Auto Dealers Are Nervous About Potential Section 232 Tariffs on Autos
Because less than a quarter of vehicles sold in the U.S. are assembled outside the NAFTA region, if 25 percent tariffs are levied on auto parts, the impact would be uneven across the auto industry. Mexico parts production -- with substantial room to grow -- is shielded from future tariffs as part of a tariff rate quota system outlined in the new NAFTA. Still, the National Automobile Dealers Association believes the hit to auto sales would be swift and severe. Patrick Mazzi, a senior economist for NADA, talked about the impact of the administration's trade policy at the National Economists Club Nov. 1.
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Mazzi, citing the Center for Automotive Research study that NADA commissioned (see 1807190014), said tariffs that did not affect Canada and Mexico would lead to 1.2 million vehicle sale losses, a $2,450 vehicle price increase and auto manufacturing losses of about 197,200, in addition to a 5 percent to 10 percent drop in auto dealer employment. It would come at a time when new car sales are softening because of the effect of rising interest rates. According to the Federal Reserve, about two-thirds of those who purchase both used and new vehicles borrow to do so. Mazzi said the average monthly payment for a new vehicle purchase is $542, and the average loan lasts five years and nine months.
NADA projects that by the end of 2018, even as borrowing costs rose by 1 percentage point, new vehicle sales will only drop by about 100,000 compared with last year. But next year, if interest rates rise another three-quarters of a percent, it projects new vehicle sales will fall by another 300,000 -- that's not accounting for any inflation from a tariff on auto parts or imported cars.
Mazzi believes the tighter rules of origin for cars in the NAFTA region could increase costs, or it could drive more companies to choose to pay the most favored nation (MFN) rate of 2.5 percent. "The auto industry's a very global industry, and they're going to figure out a way to produce at the lowest cost possible," he said. But, he said, if the administration sees that happening, it could spur the imposition of the 25 percent levy. And, he said, even if the Commerce Department report were to say there is no national security threat from imported autos, President Donald Trump "can say right back to them, 'I don't care.'"
The auto industry cannot shift production to the U.S. quickly enough to avoid tariffs, he said, since there will be about 17 million new cars sold in the U.S. this year but only 11 million vehicles assembled here. There is about 3 million units' worth of unused capacity, mostly at General Motors sedan plants, he said, since consumers now prefer crossover vehicles, trucks and SUVs to sedans and small cars. Moreover, nearly 3 million of the vehicles built in the U.S. are exported, and some of those may not find a buyer here even if domestic vehicles are protected.
Of course, in order for Canadian and Mexican production to be shielded from Section 232 tariffs, the U.S.-Mexico-Canada Agreement -- the new NAFTA -- must be ratified. And Mazzi said the continued application of 232 tariffs on Mexican and Canadian steel and aluminum have made that more uncertain. He noted that a Mexican official said that his country will not sign the deal until the tariffs are resolved. "The tentative agreement became more tentative," he said.
Mazzi noted that the European approach to avoiding tariffs -- offering to drop all industrial goods tariffs to zero -- is unacceptable to the U.S., because it would eliminate the 25 percent tax that protects domestic light trucks. "I don't think the U.S. will do it because of the chicken tax," he said, referring to the original reason the tariff was raised. "Auto manufacturers have the ear of this administration," and the Big Three would not want that, he noted.