Yves here. I wish I had written this piece. It makes a very important point: that auto company and other multinational whinging about the impact of tariffs are based on them not taking adaptive measures, some of which may not be very costly. For instance, with Brexit, where automakers will almost certainly face very high non-tarriff barriers, they have the ability to shift some UK based production to EU factories, where they have surplus capacity. The cost would be in tooling, and it is opaque to outsiders for what products and then how much in time and costs would be involved.

Richter also raises the critical issue of unequal tariffs, which is typically absent from the financial press.

One final consideration is that there is value in a country being more autarkical, and not just in promoting domestic, but in national security. The US is dependent on China and Taiwan, which is not exactly geographically secure, for chips. As we discussed earlier, the US would go into crisis in months if China were to embargo its supply of drug active ingredients. The US even relies on China to supply combat uniforms and boots. I am at a loss to understand how we got here.

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street

President Trump’s threat to impose tariffs of 20% or 25% on auto components and vehicles imported to the US is causing a bout of hysteria that is splattered all over the media.

The auto industry lobbying group, Alliance of Automobile Manufacturers, is now claimingthat a 25% tariff on imported vehicles and components would cost US consumers $45 billion a year, or $5,800 per vehicle. “This would largely cancel out the benefits of the tax cuts,” it says.

I have serious doubts about those numbers, and “propaganda” comes to mind. But even it they’re correct theoretically, the calculation assumes that the industry would not react to those tariffs except by passing them on to consumers. Consumers are unlikely to go for that program, and automakers will end up restructuring their supply chains and manufacturing to bring some production back to the US, after having spent decades on offshoring production.

That’s one purpose of tariffs. Another purpose is to persuade other countries to lower their own tariffs. It has been an uneven playing field for decades, stacked against US workers.

The EU imposes a 10% tariff on all cars, SUVs, compact SUVs, vans, and pickups imported from the US. The US imposes a 2.5% tariff on imported passenger cars, SUVs, compact SUVs, and vans from the EU and a 25% tariff on imported pickups (a tiny segment of the EU market).

China imposes a 25% tariff on all imported vehicles but offered to cut this to 15% as a goodwill gesture in the trade war. To get around the Chinese tariffs and sell vehicles to the 1.3 billion Chinese consumers, all global automakers have invested billions of dollars in China, have set up large manufacturing facilities in required joint ventures with often state-controlled Chinese companies, and have submitted to the required technology transfers. GM now makes and sells more vehicles in China than it does in the US.

Japan controls what comes into the country via administrative hurdles. US automakers have found that the costs of getting low-margin small cars over these hurdles are such that the equation doesn’t work out, which is precisely the purpose of those hurdles. US automakers have screamed about this for decades, to no avail.

NAFTA partners Mexico and Canada are tightly woven into the automakers’ supply chains. Despite the pressure from the White House to bring auto production back to the US, GM announcedjust last week that it would build its new Blazer compact SUV in Mexico, where it already employs 15,000 workers.

In terms of auto exportsfrom the US, the challenges are different with each trade partner, but they’re huge.

In terms of auto imports, Corporate America – not China, Mexico, Canada, or Germany – has been the biggest force with its relentless drive over the past decades to offshore production.

The supply chains of the auto industry go all over the globe in search of cheap labor, lax environmental laws, and other profit-enhancing factors. Shipping costs are significant, and there are risks, such as having your IP purloined, but no matter. And much of the US component industry, after having collapsed during the Financial Crisis, wandered off to China and Mexico.

While China-made components are in every vehicle sold in the US, only two models that are assembled in China are sold in the US: the Buick Envision compact SUV and the Volvo S60 sedan. Volvo is owned by Chinese automaker Geely.

So China-made components could be a big target for tariffs. In terms of assembled vehicles, the largest targets are the EU, particularly Germany, Japan, South Korea, Mexico, and Canada.

Tariffs on vehicles imported from Germany, Japan, and South Korea would mostly be a benefit for US automakers since it would make competition easier in the US. But GM has big and very troubled plantsin South Korea (GM Korea) that produce small cars, some of which GM imports to the US.

But tariffs on imports from Mexico and Canada would be a big problem for US automakers. Moody’s puts some numbersto this:

GM (GM) imports 30% of the vehiclesin sells in the US. Most of those imports are made in Mexico and Canada, including “a significant portion of its high-margin trucks and SUVs.” GM pays its 15,000 workers in Mexico less than $3 per houron average.

Ford (F) imports 20%of the vehicles it sells in the US, most of them from Mexico and Canada.

Both companies would need to absorb the costs of shifting some production from Mexico and Canada back to the US. This type of restructuring in manufacturing takes time and money. In addition, profit margins in the US would be thinner. “They would also likely need to subsidize sales to offset the tariffs during the near term, and could eventually pass on the higher costs to consumers,” Moody’s says.

Consumers might balk at higher prices, and the companies might end up with thinner profit margins, which would be anathema to Wall Street. So given the difficulty of passing the tariffs on to consumers, automakers are likely to shift some production back to the US as the lower-cost option, which would be one of the purposes of the tariffs.

Japanese automakers have been manufacturing in the US for decades. According to Moody’s:

Toyota (TM) imports 22%of the vehicles it sells in the US.

Nissan imports 31%of the vehicles it sells in the US.

Honda (HMC) would be among the least impacted automakers. It has 12 plants in the US that make Hondas and Acuras plus engines, transmissions, and other components. Four Hondas are ranked in the top 10 in terms of US domestic content, including the Odyssey, built in Lincoln, AL. It has 75% domestic content, which puts it in second place.

The idea of tariffs is to get automakers – including GM and Ford – and component makers to follow Honda’s lead and manufacture more in the US.

Hyundai imports just under 50%of the vehicles it sells in the US, it says. It already has plans to increase production in the US, and tariffs will likely be an encouragement to enlarge and speed up those plans.

Kia Motors, an affiliate of Hyundai, manufactures its Optima and its Sorento in West Point, GA, and imports the rest. Like Hyundai, it also has plans to increase production in the US. Tariffs would boost those plans.

The big three German automakers— Volkswagen, BMW, and Daimler — all have manufacturing plants in the US. Some export part of their production to other countries. They too might be thinking about how to shift more production to the US.

Jaguar Land Rover and Volvo would get hit hardby tariffs, along with other automakers that have no manufacturing plants in the US. Jaguar Land Rover is owned by Tata Motors in India.

Component makers would feel the pain. The parts that go into major assemblies may cross multiple borders, sometimes back and forth in various stages of completion, and could incur multiple tariffs on both sides of the borders. So the component industry might have to contemplate a major restructuring of its production locations – and bring some of them back from Mexico and China, which too would be a good thing for the US.

The purpose of tariffs is not to make products more expensive for consumers, though that can be a consequence. The purpose is to motivate manufacturers to invest and produce more in the US, thus changing the equation for offshoring that Corporate America has pursued with relentless passion for decades. This aspect of the tariffs is getting lost in much of the hysteria about the tariffs.

Where the heck is the hyped “replacement demand” from Hurricane Harvey? Read… I’m in Awe of How Carmageddon Continues in Houston at Financial-Crisis Levels