Will a 25% tariff on imported vehicles and assorted vital components cost American consumers 45 Billion a year, 5,800 per vehicle?

“This would largely cancel out the benefits of the tax cuts”– Alliance of Automobile Manufacturers

Let’s peel that onion

(Car dealers make their money from auto financing and insurance, also some big chunk from used cars. I’m leaving them out as it has variables outside of these forensics)

The purpose of tariffs

The purpose of tariffs is not to make products more expensive for consumers, it is to change the economics of  companies offshoring and to resolve unfair practices overseas and tariffs.

The supply chains of the auto industry go all over the globe in search of cheap labor, lax environmental laws, and all the other dastardly ways to improve profits. Almost all of the US component industry has migrated to Mexico and China.

As the cost of the passing on the new tariffs will not find an eager US. consumer, auto and component makers will have to shift some production back to the US as a lower-cost option. The model of this in action, and working in the US. favor, is Honda (detailed later on),

• In terms of assembled vehicles, the largest targets are the EU (particularly Germany), Japan, South Korea, Mexico, and Canada
• Component parts cross thru many borders in various stages of completion, and would/could incur tariffs at each stop.

What if, (work me with here as I flesh out my conspiracy theory) automakers and the component industry restructure their supply chains and manufacturing to bring production back to the US?

WTO, The European Commission and EU monetary policy

• The US. should withdraw from the WTO klatch. EU countries have few shared competencies and any WTO dispute settlement is unlikely to stir retaliation that would escalate conflicts internally within the EU.
• Intervention on the level of the dollar (manipulation against our currency). There are big European divergences on monetary policy. Germany does not follow the EU Commission’s recommendations on reduction of their current cash surplus, and this gives us the authority to impose anti-dumping duties against German products and end our subsidies for their energy production.

Reverse engineering 

• Korea’s Hyundai imports just under 50% of the vehicles it sells in the US. It already has plans to increase production in the US, and tariffs will likely be an encouragement to enlarge and speed up those plans.
• Kia Motors, an affiliate of Hyundai, manufactures its Optima and its Sorento in West Point, GA, and imports the rest. Like Hyundai, it also has plans to increase production in the US. Tariffs would boost those plans.
• India’s Jaguar Land Rover (owned by Tata Motors) and Volvo cars (owned by Geely) would get hit hard by tariffs, along with other automakers that have no manufacturing plants in the. In expectation of Trump tariffs Volvo just opened a plant in South Carolina to manufacture the new S60, and will start SUV manufacturing there in 2021.

Now let’s go big (or go home)

Europe

• The EU imposes a 10% tariff on all cars, SUVs, compact SUVs, vans, and pickups imported from the US.
• The US imposes a 2.5% tariff on imported passenger cars, SUVs, compact SUVs, and vans from the EU and a 25% tariff on imported pickups (this tariff has worked as intended as foreign car companies with pickups make them in the US
• Volkswagen, BMW, and Daimler have manufacturing plants in the US. and export part of their production to other countries. They will need to bring their production into the US.
• BMW assembles its moneymaker, the SUVs (X3 and X5) in South Carolina

Japan 

Japan controls what comes into the country via administrative hurdles. US automakers have found that the costs of getting low-margin small cars over these hurdles are so onerous that the economics doesn’t work out, which is precisely the purpose of those hurdles.

• Toyota imports 22%of the vehicles it sells in the US. It’s Lexus line is +/- half its profits in the US, but only a bit more than 1 in 8 sales
• Nissan imports 31%of the vehicles it sells in the US.

Honda is the prom king and queen. It would be among the least impacted automakers.

• Honda has 12 plants in the US that make Hondas and Acuras plus engines, transmissions, and other components
• Honda has 4 cars ranked in the top 10 in terms of US domestic content
• Honda ‘The Odyssey’ is built in Lincoln, Alabama and has 75% domestic content

China 

China imposes a 25% tariff on all imported vehicles but has recently offered to cut this to 15% as a goodwill gesture in the trade war. 

1. To get around the Chinese tariffs and sell vehicles to the 1.3 billion Chinese consumers, automakers invested billions in China, set up manufacturing facilities in joint ventures with the China Communist Party (or its proxies) and complied with demands for technology transfers (itself a large and enduring tax)
2. China-made components are in every vehicle sold in the US, yet only two models that are assembled in China are sold in the US. Those components are a target for tariffs.
3. GM makes and sells more vehicles in China than it does in the US.

Mexico and Canada

The NAFTA countries are fused within supply chains. GM announced in early June, 2018, that it would build its new Blazer in Mexico, where it already employs 15,000 workers.

In terms of auto exports from the US, the challenges are different with each trade partner.

While as tariffs on vehicles imported from Germany, Japan, and South Korea would mostly be a benefit for US. automakers, tariffs on imports from Mexico and Canada would be a bigly problem for US automakers.

• GM imports 30% of the vehicles in sells in the US. Most of those imports are made in Mexico and Canada, including a significant portion of its high-margin trucks and SUVs. (GM pays its 15,000 workers in Mexico less than $3 per hour on average)
• Ford imports 20%of the vehicles it sells in the US, most of them from Mexico and Canada.

Both companies would need to absorb the costs of shifting some production from Mexico and Canada back to the US. This type of restructuring takes time and is expensive and in the US, their profit margins would be less.

The End