Border adjustment tax would see costs heaped on automotive industry

04 September 2017 4 min. read
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With the increasing prospect of a border adjustment tax on vehicle related imports, automotive producers face between $1,000 and $1,800 in additional fees per import, depending on the production cost of vehicles, as found by a new study. The reshoring of the work to the US is unlikely to see investment recouped within a reasonable timeframe for most parts.

The rise to power of billionaire tycoon Donald Trump was partly on the back of his insistence that the auto industry in the US was getting a raw deal from neighbouring nations, largely as a result of the NAFTA free trade agreement. The now incumbent President of the United States has not acted on his pledges so far, more recently mollifying his original statements as a range of sectors, from manufacturers to governments, continue to warn of the repercussions.

The US auto industry is a major player in the country’s economy, with automakers and their suppliers currently responsible for 3% of America's GDP. No other manufacturing sector generates as many American jobs, suggesting a period of contraction may have dire consequences for the US economy in the long-term. The Donald Trump administration has talked for some time of increasing tariffs to boost the domestic auto market and put consumers off investing in imported vehicles – however the likely effect of tariffs would see the domestic market stung by inflated prices for parts and maintenance, costing manufacturers between $21.6 billion and $23.8 billion.

NAFTA trade flowsNew analysis, this time by the Boston Consulting Group, commissioned by the Motor & Equipment Manufacturers Association (MEMA), explores the effects of border adjustment tax (BAT) proposed by the president on the automotive parts industry. The report, titled ‘Impact of BAT and NAFTA Reforms on the U.S. Motor Vehicle Industry’, has found that trade flows around vehicles from the US vehicle industry vary considerably between types, vehicles or parts, as well as net imports and exports. Canada is the biggest export market for US vehicles and parts, totalling $44 billion. Imports from Canada, however, result in a net balance of -$13 billion, largely due to the import of vehicles. Mexico too shows higher levels of imports over exports, with net imports of vehicles totalling $51 billion and parts totalling $21 billion.

The biggest segments for import into the US from Canada is passenger vehicles and parts, at $46 billion and $9 billion respectively. From Mexico, imports are broadly split between passenger vehicles, heavy-duty trucks and parts, at around $25 billion. The US sold considerable numbers of parts to both Canada and Mexico, amounting to $17 billion and $16 billion respectively.

Economics of reshoring parts production

A range of parts and the respective cost of reshoring production to the US were also analysed. The result, calculated with a 15% BAT rate, varies drastically. For one potential component of a vehicle interior, a $50 million investment would see overall costs rise by an estimated +$2 per unit, with various cost reductions in freight and BAR unable to offset labour cost increases – there would therefore be no long-term payback on such an investment.

For another interior vehicle part considered by the firm, the payback on a $50 million reshore investment would be around 9 years. Moreover, total savings when considering freight and BAR costs amount to a net boost of ~-$11 per unit, even when considering labour cost additions.

The firm also considered the total additional cost to manufactures of vehicles for 12 OEMs across the US market. The increase in average costs from the introduction of a BAT of 15% would see ~$1,025 added to the cost of production. Two of the surveyed OEMs would benefit from the introduction, while the majority would incur some form of additional cost – recouped from profit or passed on to consumers.

Effect of BAT added to production costs

The story becomes even more expensive in a 20% BAT case, average cost increases would amount to ~1,800 across the 12 OEMs considered, with only one being able to benefit from such an introduction, while 5 OEMs would be above average, ranging from $2400 to $4,400.

BCG researchers noted that, in addition to making production considerably more expensive, the US would likely see a net decrease in employment in the sector, with between 20,000 and 45,000 at risk according to the firm’s analysis.

“President Trump has said that he wants to increase jobs in America and put forward tax reform and trade policies that are in the best interest of American businesses, consumers, and workers,” Steve Handschuh, President and CEO of the MEMA said. “The objective of tax reform and NAFTA renegotiation must be to strengthen US manufacturing competitiveness, and MEMA is working hard to make sure this objective is met.”