U.S. tariffs on imported vehicles and their components, possibly coming in the next six months, would drive up prices for cars and light trucks on the domestic market. Heavy tariffs would raise U.S. auto prices in general, but automakers that rely on imported vehicles would be hit hardest. The tariffs would erode sales of more affordable vehicles produced outside North America by companies such as Hyundai, Volkswagen and BMW and could stall these companies' plans to expand their U.S. market share until at least the mid-2020s. Considering domestic political factors, including the next presidential election in 2020, the current administration may choose less disruptive options, such as exempting NAFTA members from tariffs.
The prospect of U.S. tariffs on automotive imports is looming large in the minds of carmakers around the globe, but the United States itself would feel some of their biggest effects. If the U.S. Department of Commerce determines that auto imports harm national security, then the White House can erect additional trade barriers — tariffs on finished vehicles and perhaps their components — that would raise prices for U.S. consumers. Depending on their severity, the fees could put hundreds of thousands of U.S. workers out of work, largely in automobile retail. But the fallout could be short-lived. The approach of the 2020 presidential vote would force President Donald Trump's administration to find a balance between its trade goals and the economic pain facing consumers and workers. By then, the administration may have gotten enough concessions from its partners in trade deals to opt for lighter tariffs — or forgo them altogether.
The Big Picture
As part of its drive to protect domestic manufacturing, the administration of President Donald Trump is considering higher tariffs on imported automobiles and possibly auto parts. Aside from affecting trade patterns, the fees would raise car prices and reduce the appeal of imported vehicles for some consumers. They would also make it difficult for some Japanese, South Korean and German automakers to increase their market share without expanding production in the United States.
The Impact of Tariffs
Since May, the Department of Commerce has been investigating whether tariffs or quotas are necessary under Section 232 of the Trade Expansion Act of 1962. Some form of tariff is looking more likely, and though the nature of the levies remains hard to pin down, the import fees on finished vehicles and auto parts could be as high as 25 percent. According to the Center for Automotive Research, a tariff that high on finished vehicles and parts could raise the price of an automobile assembled in the United States by up to $1,100. For an imported vehicle, the cost would jump by $4,000. The price increase would alter the expansion plans of Japanese, German and Korean automakers that either make their vehicles entirely overseas or lack significant production facilities for top-selling models in North America. (Under the tariff guidelines, the price increase would be less severe for a vehicle containing a high number of parts made in the United States or at existing plants elsewhere in the North American Free Trade Agreement area.) Higher prices would also lead to job losses in the dealership networks of those East Asian and European automakers.
But the government tariffs or quotas could have side effects as well. Because of the fees, consumers seeking better deals would gravitate toward U.S.-made and used vehicles, driving up their prices. And other factors — including surging oil prices, rising interest rates and a slowing economy — would worsen any slump in vehicle sales resulting from Section 232 action. Under these conditions, vehicle sales would probably drop for domestic automakers, too, though not nearly as much as for foreign brands.
The severity of the price increases depends on which recommended option from the Commerce Department — high tariffs, lower tariffs, quotas or no action — the White House chooses to turn into policy. The higher the tariff, the more disruptive it will be for consumers and automakers. For foreign manufacturers such as Mazda, Audi, BMW and Hyundai, high tariffs would depress sales of some models. BMW's 3 Series, Volkswagen's Audi A4, Hyundai's Kia Soul and Mazda's 3 model, for example, all have minimal NAFTA content. As the brands' more affordable vehicles, these cars occupy market segments that are especially sensitive to price fluctuations. While more expensive models from these brands may still sell well, some consumers would probably shift to cheaper options — almost certainly from automakers less affected by tariffs. Auto brands such as Kia and BMW would then depend on more expensive models already produced in the United States to drive their U.S. sales.
Looking Down the Road
In recent weeks, the Trump administration has indicated that automotive tariffs may become more than just a threat used in negotiations. The president announced Aug. 27 a preliminary agreement with Mexico on the issues that had stalled talks to revise NAFTA. Under the deal, Mexico acquiesced to Section 232 tariffs on automotive production from factories that have yet to be built. (The country already has an exemption for current production.) This development shows that Washington sees tariffs as a plausible lasting outcome and not just a tool to wrangle concessions from its trading partners.
Should Trump win another term in office in 2020, the Section 232 tariffs may well continue, perhaps significantly eroding sales for Mazda, BMW and Volkswagen. Expanding production at plants in Mexico or building new factories there would not be an option for these companies, and increasing production of sedans and hatchbacks in the United States may not be economically sound, either. Japanese, Korean and German automakers would rethink their expansion plans for the U.S. market and put off projects to ramp up North American production until at least the mid-2020s if heavy tariffs drive down their sales. By then, U.S. automakers and those with plants in North America may have expanded into the market segments where the foreign automakers were once competitive.
Of course, Congress could thwart the administration's efforts to implement or sustain Section 232 tariffs. Lawmakers are taking a look at granting the Department of Defense the authority to determine whether imports harm national security. That proposal is tentative, however, and if the administration were to seriously consider severe tariffs, Congress may be hard-pressed to act. Trump could also lose in 2020, and his successor may not wish to continue his policy of limiting the market share of foreign car brands. A new president may try to cut automotive tariffs, though doing so could disrupt supply chains that have adapted to the fees, a risk that could prevent their complete rollback.
If the Trump administration implements tariffs on the auto industry, they will have major effects on the domestic economy, including job losses. The import fees will force automakers to alter their business and growth plans, deterring some East Asian and European companies from expanding their U.S. presence and making them less competitive in sertain segments. They will also push up auto prices — the only question is by how much.
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