Tuesday, July 3, 2018

The Potential Pain of Automotive Sector Tariffs and Their Unintended Consequences

With the Trump Administration repeatedly threatening a trade war in the name of protecting the U.S. economy and American voters, analyses by the National Taxpayers Union Federation (NTU) and Trade Partnership Worldwide calculate the ultimate impact of the Department of Commerce and its Federal Register Notice on a national security investigation of automotive tariffs under Section 233 of U.S. trade law.

Let's start by looking at the Department's Federal Register notice which is entitled Notice of Request for Public Comments and Public Hearing Section 232 National Security Investigation of Imports of Automobiles, Including Cars, SUVs, Vans and Light Trucks, and Automotive Parts:

You can also submit a written comment to the Department of Commerce by clicking on this link.

In case you were wondering, Section 232 is an aging bit of legislation that allows the President to restrict imports of goods if the Secretary of Commerce finds that the import of these goods threatens national security.  Under the current investigation, the Trump Administration is considering imposing new taxes that could be as high as 25 percent on imported automobiles and automotive parts.

Obviously, this is going to have an impact on American consumers of automobiles and associated products.  An NTU Foundation analysis, using 2017 trade data, suggests that a 25 percent tariff would result in the following:

1.) U.S. import taxes would rise by 297 percent from $33 billion to $98 billion.

2.) the average price of imported cars would increase by $4,025 per vehicle if the tariff was raised from its current 1.3 percent effective rate (the general tariff rate for passenger vehicles is 2.5 percent).

3.) the average federal taxes owing on imported pickup trucks would increase by $5,089 per truck. 

4.) prices for cars assembled in the United States would increase by at least $1,262.

An analysis by Trade Partnership Worldwide found the following impacts of a 25 percent tariff:

1.) the tariffs would increase U.S. motor vehicle and parts sector employment by 92,000 jobs.

2.) the rest of the U.S. economy would lose 250,000 jobs.

3.) the tariffs would result in a net loss of 157,291 U.S. jobs or a loss of nearly three jobs for every job gained in the automobile and automotive parts sectors.

4.) tariffs would add $6,400 to the price of a $30,000 imported automobile.

4.) U.S. GDP would decline by 0.1 percent thanks to higher automobile costs and overall net job losses.

Here is a table showing the macroeconomic impact of a 25 percent tariff on imported automobiles and automotive parts:

What is interesting about this potential automotive sector trade war is the fact that many foreign automobile manufacturers have opened factories in the United States including, but not limited to:

1.) Toyota - Georgetown, KY, San Antonio, TX, Blue Springs, MS, Princeton, IN

2.) Nissan - Canton, MS, Smyrna, TN

3.) Honda - Greensburg, IN, East Liberty, OH, Marysville, OH, Lincoln, AL

4.) Daimler (i.e. Mercedes) - Vance, AL, Lanson, SC

5.) Fiat Chrysler - Belvidere, IL, Detroit, MI, Toledo, OH, Warren, MI

6.) Subaru - Lafayette, IN

7.) Hyundai - Montgomery, AL

8.) Volkswagen - Chattanooga, TN

Let's look at some statistics from the three largest Japanese car companies.  According to Toyota, the company employees 136,000 direct and indirect employees in the United States, Honda employees more than 31,000 direct employees along with 158,000 dealership employees with a total U.S. payroll of $2.3 billion (in 2017) and Nissan has more than 22,000 U.S. employees, including 16,000 manufacturing jobs and a $1.3 billion annual payroll (2016).  

With all of this data in mind, let's close with the final paragraphs from the NTU Foundation analysis:

"Increased car and truck prices are just the tip of the iceberg. Additional costs would be imposed on U.S. workers as other countries retaliated by imposing tariffs on U.S. exports. In addition, according to Commerce Secretary Wilbur Ross, “Economic security is military security. And without economic security, you can't have military security.” If the United States restricts imports based on vague “economic security” reasons, other countries can be counted on to use similar logic to restrict U.S. exports of food and other products.

The Commerce Department should quickly dispose of this far-fetched and potentially costly “national security” investigation into motor vehicle imports."

Given these analyses, one has to wonder which Americans will really benefit from an automotive sector trade war or is this just going to be another case of painful unintended consequences of a poorly thought out and politically-motivated plan?  One thing that these analyses do show is that Main Street America is going to pay a heavy price if Washington adopts a 25 percent tariff on imported automobiles.

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