Although the United States remains heavily focused on its trade dispute with China, the U.S. administration has another target in its crosshairs: the global automotive sector. The damage to supply chains and the auto sector could dwarf all previous moves made by President Donald Trump. But the proposal is also likely to see substantial pushback from within the United States.
U.S. President Donald Trump is threatening to throw another monkey wrench into global trade with a 25 percent tariff on autos and auto parts. On May 23, the U.S. Commerce Department opened an investigation into whether foreign countries have taken advantage of the U.S. auto sector and whether it can be protected under the national security umbrella. The proposal raises a number of questions, but these are the important ones Stratfor is asking and answering:
What Is a Realistic Timeline for the Investigation?
From the start of the trade inquiry this week, the commerce secretary has 270 days to finish the report. The United States is turning to the same law it used to hit steel and aluminum imports — Section 232 of the Trade Expansion Act of 1962 — to delve into the necessity of cars, trucks and auto parts. To stand up to legal scrutiny, the Trump administration would, at least, have to go through the motions of conducting an internal review on the impact of auto imports on national security. That process includes public hearings and consultations with other government departments. The steel-and-aluminum investigations took the full nine months.
And they were done with little public comment and transparency and also departed from previously established investigative norms. Nonetheless, the Trump administration has set its own precedent in widening the definition of national security to include economic security and could use that as a legal basis to justify its moves. However, the case for steel and aluminum was far easier to make, and skeptics called those investigations thinly veiled protectionist moves. The case for autos will be harder to make.
How Divisive Would These Tariffs Be in the United States?
The short answer is extremely. The tariffs on steel and aluminum proved to be quite controversial, forcing delays in the Section 232 report to the president and weakening full implementation of the tariffs. While the steel and aluminum lobby is a powerful one that supported the tariffs for protection, the auto industry is probably stronger and it will largely oppose the tariffs because its supply chains are so heavily globalized.
The auto industry and consumer groups can be expected to descend on Capitol Hill to attack the import fees, and Congress could further push back against the White House's unilateral moves — especially in light of the weak national security claim for vehicles. Momentum in Congress is growing to check a U.S. withdrawal from the North American Free Trade Agreement (NAFTA), and earlier this month a bipartisan group of members of the House of Representatives introduced the Trade Authority Protection Act, which would allow further congressional review of trade moves by the White House.
Which Countries Would Be Affected the Most?
While the root cause of the problem in the steel and aluminum sectors can be traced back to excessive Chinese production, the same is not true about vehicle imports. Though China is the second-largest source of imports for auto parts, it accounts for only 1 percent of finished passenger vehicles. The top sources of vehicles are all U.S. allies in Asia, North America and Europe. The United States imported $191.7 billion worth of passenger vehicles in 2017. The large majority came through countries with free trade agreements (i.e., the applied tariff level was zero), or the vehicles were subject to only a 2.5 percent tariff (on trucks, the U.S. applied tariff level is already 25 percent). In addition, the United States imported $143.1 billion in auto parts.
How Much Leverage Does the U.S. Get in Trade Talks?
The proposed tariffs are likely to be a key negotiating tactic, and leaks on them could be part of U.S. tactics in NAFTA talks. The United States has been trying to get Mexico and Canada to agree to higher percentages in its rules-of-origin requirements for the auto sector — those rules govern whether a vehicle qualifies to be a tariff-free import — in order to boost U.S. production. Now, the United States is pressuring Mexico to accept a minimum wage-related requirement that would undermine its competitive advantage in wages for the auto sector. The United States could also tie a tariff exemption to completing the NAFTA talks.
Trump has consistently singled out the auto sector as one where the United States is being treated "unfairly" because of the higher tariffs other countries have on U.S. vehicles. The president would likely link tariff exemptions to reciprocal access around the world. That is, if Germany or Japan wants an exemption, its government would need to match the U.S. import fee (2.5 percent) for most cars. Germany has already tried to push the European Union to reach a limited trade deal on industrial products with the United States because of the steel and aluminum import tariffs. The threat of vehicle tariffs would only push Berlin harder in this direction, though it would invite more opposition from France, which does not have to worry about large vehicle exports to the United States being affected by the tariffs like Germany.
What Is the Worst-Case Scenario?
Despite its huge potential impact on trade, the U.S. tariff-threat strategy may fail. If implemented without exceptions, the 25 percent import fee on passenger vehicles alone could cost the United States $48 billion if other countries retaliated. That tariff across the board on auto parts could cost $36 billion. For a comparison, if the United States went through with its tariffs on $50 billion worth of Chinese goods as part of the Section 301 investigation, the damages would have totaled only $12.5 billion. If the additional $100 billion worth of goods were included, it would have totaled $37.5 billion. While a World Trade Organization case could be filed against the United States over the auto tariffs, the European Union and other countries may decline to do so because the cost would likely outweigh the benefit. Also, the United States would defend its actions by pointing to national security.
However, now that the White House has floated the option of tariffs, countries with auto and auto parts industries must take heed and be aware that the United States can use them as leverage. But the United States will probably walk back substantially from these threats as U.S. internal checks come to bear on Trump policy and settlements are negotiated abroad.