US Trade Tariffs

The US auto industry has been worried for most of this year thanks to President Trump and his desire to “shake things up”.

If the 25% tariff on imported cars is fully implemented it will hurt a lot of people in different ways. On one side, importers are worried that sales would drop off considerably as buyers delay purchases of new vehicles. Most people who buy an import are not likely to buy a local car – they want prestige and a higher level of luxury. So, if import sales dry up, then the eco-system from the importer to the dealer network will struggle for revenues and that will mean some dealers trimming employees and others possibly going to the wall. In either situation, there will be job losses.

One option that the importer has, is to encourage the manufacturers to absorb the price increase. This would be hard as many of the manufacturers are already struggling with sales and costs. The Japanese Government is especially worried about this option so the US President simply suggested that they increase local US production. That leads to an interesting question: is the cost of the imported car plus tariffs less than the cost of building in the US? There is a reason why Toyota still imports over 700,000 vehicles into the US and the answer must relate to costs and therefore profits.

I read a report that the US manufacturers will also get hurt because they import cars from outside the old NAFTA boundaries including China, Japan, Poland and South Korea. For a while, Canada and Mexico were in the firing line however thanks to the (as yet) unratified NAFTA replacement (USCMA), they are likely to be exempt.

There is another problem – Trump’s steel tariffs. This set of tariffs was designed to make imported steel more expensive. However the opposite has happened and it was likely to be an obvious pricing war tactic missed by “the great negotiator”: the President. Here’s how it works:

1. The price of a product is $100 and a 20% import tariff is applied.
2. That makes the imports $120 and the local product remains at $100.
3. The local producers realise they can make more so they increase their price to $115 – still cheaper than the imports.
4. The importer discounts their price by 5% and charges $114.

Now the import price is cheaper than the local price, all thanks to the greed of the local producer. That appears to have happened to steel pricing and Ford is very unhappy. Ford has committed to buy local steel, however it is more expensive than the imported product. So much so that Ford’s CEO has recently said that they had a $1B dent in their profits thanks to this vital commodity that has had a price rise of 28% since the tariffs were implemented. That also affects the workers because they were part of a profit sharing scheme which has been depleted.

Ford are suffering in another way as well. China has slapped a 40% tariff onto US automotive imports and that has put a brake on sales of Lincoln in that country! By brake I actually mean an emergency stop – sales literally fell off a cliff.

President Trump believes that tariffs are the best negotiating tool he has. I think it is his only tool, he doesn’t seem to know any other way and economists have known that tariffs skew markets very badly and cause widespread economic damage on both sides of the argument. Trump’s desire to make himself look tough ignores the destruction that follows in his wake – a common aspect of his life.

It is very difficult to compete against a country with lower living costs and tariffs simply don’t work in a highly competitive market. There are times when a manufacturer has to assess the situation and either abandon a market where they cannot compete on price or find a greater value for their product – and that means a higher quality or safer product to justify the pricing. Often, it is cheaper to walk away from a low profit market altogether and develop a new one, providing a cash cow can fund it.