Trump and GOP tariff plans to boomerang back on US automotive market

17 March 2017 Consultancy.uk

Trump and the GOP are looking to boost the US automotive industry through the introduction of tariffs on imports from Mexico and China, among potential other targets. Yet the key reasons for the decrease in manufacturing positions in the US may well be automation, not offshoring. The effect of tariffs would see vehicle import costs jump by up to $13.3 billion for the Trump plan and $36 billion for the GOP plan. US automotive costs too are set to increase, by up to $2,000, due to higher costs for parts, costing the industry between $21.6 billion and $23.8 billion. The net effect may well be higher prices for consumers, lower margins for companies and fewer jobs.

The US automotive industry has suffered, according to now official sources, unfair competition from Mexico and China, among others. To rectify the situation, and to create more “American jobs” plans have been voiced to introduce tariffs on imports of vehicles, and parts, from a number of countries.

The effect of tariffs on consumers, companies and vehicle costs, is not well understood however. To better understand the effect of tariffs, as well as wider economic policy that may be being introduced in the US, Roland Berger studied their economic impact in a report titled ‘US automotive industry: Planned border adjustment tax could destroy profits and jobs rather than protecting them’.

North America light vehicle production

Light vehicle production in the US stood at 12 million units last year, up slightly on 2015 when production stood at 11.8 million units. In Mexico unit production increased to 3.5 million, up from 3.4 the year previous. Canada produced 2.4 million units in 2015. The US has remained almost stagnant in terms of production increases since 2000, while Mexico has seen its total production increase by 3.9% since 2000.

Announced automaker investments

While US production has stayed relatively steady, considerable investments were made in the country by the industry, accumulatively totalling $110 billion. The lion’s share of that investment occurred between 2010 and 2015, with the latter year seeing investments totalling $28.4 billion. Mexico saw investment into its industry increase sharply between 2010 and 2015, with total investments hitting 24.1 for the period – while since 2000 investments totalled $28.4 billion.

The researchers too noted that all of the seven largest automotive manufacturers in North America have their manufacturing bases in the US itself, with future planning including investment in both the US and Mexico.

Loss of pre-recession jobs due to automation

While much has been said about foreign competition cutting into US employment, the drop in employment in the industry may well have another cause: automation.

According to the study, the decline in employment within the sector began well before manufacturing in Mexico began to take off in 2009. Between 2000 and 2009 employment CAGR in the US stood at -7.3%, seeing sector employment fall from 1.3 million to 0.7 million. During the same period employment growth in Mexico saw around 100,000 people join the labour force in the country.

The drop in employment, according to the consulting firm’s analysis, is largely the result of automation within the sector, as well as the effects of the financial crisis. Production in 2014 (11.4 million units) returned to levels last seen in 2000 (12.4 million units), however, the total number of employed in the sector is now 400,000 fewer than in 2000.

Additional cost of imported vehicles Trump and GOP plans

While the exact cause of the reduction in people employed within the automotive industry may in part be due to automation, which is likely to increase rather than decrease, the policies being outlined by Trump and the GOP are unlikely to improve the situation for US manufacturers, the firm argues.

In 2015 the US imported $37.9 billion in car value from Mexico, at $18,177 per vehicle on average, while around $0.1 billion in exports entered the US from China, at around $25,491 per vehicle on average. Trump’s policy would see between 20%-35% slapped onto imports from Mexico for a total vehicle cost of $21,812 to $24,539, while the GOP would opt for a 20% increase. Trump would slap a 45% premium on vehicles from China seeing total cost come in at $36,961, while the GOP would increase costs by 20%, to $30,589. The GOP plan goes considerably further than just hitting Mexico and China with tariffs, by also hitting imports from the rest of the world with an additional 20% cost.

In total the tariffs would see costs increase by between $7.6-$13.3 billion in Trump’s plan and $36 billion in the GOP plan.

Additional cost of US parts imports for domestic production

While the cost of Mexican, Chinese and potentially globally imported cars would see steep increases, the research also considers other implications to tariffs – this time on US manufacturers. While much of a car is put together in US factories, a number of parts are produced across the globe. The additional cost for the Trump plan would see between $15.2 billion and $21.6 billion added to the total cost of imports, while in the GOP plan it sees an additional cost of $23.8 billion for manufacturers.

The consequences of the Trump plan would see the cost of imported vehicles increase between $3,600 and $6,400, while for the GOP it would mean increased cost of $3,600 and $4,800. Even US vehicles would see increased costs, due to tariffs on parts, totalling between $1,300 to $2,000. The effect on US OEM is likely that their profit margins will be wiped out, or see costs passed onto consumers.

According to the authors, “As a consequence the border tax proposals may achieve the exact opposite as intended – US companies and US consumers will have to bear the extra costs, leading to weaker vehicle sales, lower margins and eventually even less jobs than today.”

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