Analysts: Trump doesn't get the auto industry; tariffs hurt consumers

Auto industry analysts and advocates say American consumers will be hurt if President Donald Trump follows through on using "national security" concerns about declining manufacturing jobs to justify adding a major tax on imported trucks, cars and auto parts.

They say his call for tariffs reflects a lack of understanding of the intricacy of the auto supply chain, and expressed alarm at Trump's move Wednesday to order a Commerce Department investigation of the possibility.

Industry coalitions, the Republican chairman of the Senate Foreign Relations Committee and the U.S. Chamber of Commerce expressed alarm at the president's move — but the UAW said it supported a review of trade policy, calling a look at auto imports long overdue.

Read more:

"This is a huge deal," said Kristin Dziczek, vice president of Industry, Labor & Economics at the Center for Automotive Research in Ann Arbor. "U.S. sales were 17.3 million last year, but the country only produced 11 million light vehicles."

About 2.4 million of those vehicles were exported, mostly to Canada and Mexico, so, Dziczek noted, 8.7 million, or 44% of the cars, SUVs and light trucks sold in the U.S. last year were imported.

"Many of the Canadian and Mexican imported vehicles have U.S.-made engines, transmissions and other major parts and components," Dziczek said. "The biggest exporters from the U.S. to both EU and China are BMW and Daimler."

John Bozzella, CEO of the Association of Global Automakers, called it “a bad day for American consumers."

His group, which represents foreign automakers and parts makers doing business in the U.S., plus some domestic suppliers, said Thursday, "This course of action will undermine the health and competitiveness of the U.S. auto industry and invite retaliation by our trading partners, as, around the globe, officials raised concerns about what the suggestion of such a tariff scheme might mean."

The Alliance of Automobile Manufacturers, which represents U.S. automakers and many foreign companies, criticized Trump's move: "We are confident that vehicle imports do not pose a national security risk to the U.S. ... We urge the administration to support policies that remove barriers to free trade and we will continue to work with them and provide input to achieve that goal.”

Trump, who used the same provision of law, Section 232 of of the Trade Expansion Act of 1962, to impose tariffs on steel and aluminum, revealed that plan with steelworkers by his side. This plan, auto executives say, blindsided them.

Trump rolled out 25% tariffs on steel imports and 10% on aluminum in March but offered temporary exemptions to the European Union, Canada, Mexico and a number of other allies. India and China are challenging the tariffs before the World Trade Organization, Reuters reported.

Analysts wondered whether Trump's auto announcement wasn't a play for votes in the industrial north — Michigan, Pennsylvania, Ohio and Illinois — as political parties vie for control of statehouses and the U.S. House is heading into a volatile midterm election cycle.

Many believed he was mainly seeking leverage in talks to revise the North American Free Trade Agreement with Canada and Mexico, a deal he has deemed unfair and has pledged since the 2015-16 campaign to renegotiate.

Trump teased the announcement in a tweet Wednesday morning, promising "big news" for U.S. autoworkers.

"After many decades of losing your jobs to other countries, you have waited long enough!" he wrote.

Investigation ordered

The president announced late Wednesday that he asked Commerce Secretary Wilbur Ross to investigate whether auto imports are a threat to national security.

"Core industries such as automobiles and automotive parts are critical to our strength as a Nation," Trump said in a short statement released by the White House Press Office.

Imposing tariffs through Section 232 is not fast. He ordered the Commerce Department to investigate steel imports in April 2017, 11 months before he imposed tariffs.

Michelle Krebs, executive analyst for Autotrader, "It is unclear if this will reach fruition as there clearly will be loud objections from many."

Dave Sullivan, manager of product analysis at AutoPacific Inc., said the call for tariffs reflects a lack of understanding about how the industry works.

"There is no vehicle manufactured in the U.S. today that doesn't have at least one part from outside the U.S.," he said. "Every vehicle assembled today requires a logistical symphony due to the far corners of the world that some parts come from. With the exception of Tesla, every vehicle manufacturer imports and exports vehicles based on U.S. consumer demand. GM and Ford have vehicles that come from Asia or Europe. Some are so low volume that they don't warrant manufacturing capacity in the U.S. to support it."

Sullivan said, "This has the potential to reach far and wide and provide little to no benefit to U.S. consumers. This could also be the last straw for an all-out trade war, as many countries are growing tiresome of threats."

Fact is, there are also some jobs that Americans just don't want to do, analysts said, such as hand-stitching the leather of steering wheels or soldering printed circuit boards in a job market that is already strained by low unemployment.

"This could really backfire," Sullivan said. "Also, the auto industry is very cyclical and if more manufacturing was moved to the U.S., we'd just increase our dependence and exposure to the waves of auto manufacturing and demand."

American automaking is thoroughly integrated into a global system of vehicle and parts production now.

"Republicans used to be supporters of free trade. I'm not sure where that got lost in this administration," Sullivan said.

'We weren't briefed'

An industry official who is not authorized to speak publicly said blue-collar workers will like what they hear from Trump because it sounds like it supports jobs in America.

"Fact is, we weren't briefed on this. We didn't ask for it. Who was in the room?" the industry official asked.

Analysts also wondered whether Trump doesn't genuinely think the tariff threats will be effective. Just this week, China significantly reduced its auto import tariff on vehicles.

At the Brookings Institution, a public policy research center in Washington, D.C., Joe Parilla, a fellow at the Metropolitan Policy Program who studies the effects of trade, said Michigan, Ohio, Indiana, South Carolina, Alabama and Tennessee are among the states that could feel the impact of tariffs the most because of plants in those states.

"To make things in a modern global economy you need to be able to import (other items to make them) pretty seamlessly," he said. Parilla said that by imposing tariffs — if that were to happen — you might create more jobs in the long run but you also run the risk of pushing manufacturers out of the country altogether as they try to remain competitive worldwide.

"It's a bit of a risky gamble and there could be a lot of disruption along the way," he said.

Everyone seems to agree that the best thing to do in the short term is wait and see what unfolds over the next six to 12 months, when a review must be completed to determine whether actions based on national security are justified.

“We are all learning that initial bluster can be just that, so time is needed to see what will actually come to pass," said Jonathan Smoke, chief economist at Cox Automotive. "Like threats of changes to country of origin numbers in NAFTA, the impact to the industry would vary. A new import tariff would hurt luxury models the most. A tariff would raise prices and limit consumer choice, but would encourage more domestic production. There would be winners and losers from such a move throughout the value chain if it comes to pass.”

Foreign companies in U.S.

Domestic automakers now build vehicles in China, South Korea and other overseas locations and then ship them back to America.

And the foreign-based car companies point out that they employ hundreds of thousands of Americans in manufacturing operations and car dealerships all over the country. Global Automakers lists state-by-state data on the multibillion dollar economic impacts of its members.

To highlight a few; Honda builds in Alabama, Georgia, Indiana and Ohio; Toyota builds in Alabama, California, Indiana, Kentucky, Mississippi, Tennessee and Texas; Volkswagen builds in Tennessee; Hyundai builds in Alabama and Georgia; Kia builds in Georgia; BMW builds in South Carolina; Mercedes-Benz builds in Alabama, Indiana and South Carolina; Nissan builds in Mississippi and Tennessee; Subaru builds in Indiana.

Meanwhile, negotiations over NAFTA have dragged on with the president promising to renegotiate its terms or withdraw from it entirely.

Trump has indicated he may withdraw from the agreement that he — and many blue-collar voters and their labor leaders — have argued drives jobs out of America to Mexico and elsewhere. Yet automakers have been supportive of NAFTA, with partnerships and investments formed over the past two decades.

On Wednesday, before announcing the tariff investigation, Trump railed about NAFTA talks.

"NAFTA is very difficult," he said as he boarded Marine One. "Mexico is very difficult to deal with. Canada has been very difficult to deal with it. They have been taking advantage of the United States for a long time.

"I am not happy with their requests," he continued. "But I will tell you, in the end, we win. We will win, and we'll win big. We'll get along with Mexico; we'll get along with Canada. But I will tell you, they have been very difficult to deal with. They're very spoiled — because nobody has done this. But I will tell you that what they ask for is not fair."

Trump is exploring tariffs of as much as 25% on auto imports, the Wall Street Journal said.

"It seems designed to pressure Canada and Mexico to accept the U.S. proposal at the NAFTA table," Dziczek said. "Could be, but there are plenty of UAW jobs tied to making engines, transmissions and other parts for vehicles imported from Canada and Mexico."

For example, southeast Michigan is closely tied to Ontario in auto production, with more than $70 billion of vehicles, parts and other items traveling between the two each year.

The U.S. Commerce Department statement said: "The investigation will determine whether imports of automobiles, including SUVs, vans and light trucks, and automotive parts into the United States threaten to impair the national security ... Secretary [Wilbur] Ross sent a letter to Secretary of Defense James Mattis informing him of the investigation.

“There is evidence suggesting that, for decades, imports from abroad have eroded our domestic auto industry,” Ross said in the release. “The Department of Commerce will conduct a thorough, fair and transparent investigation into whether such imports are weakening our internal economy and may impair the national security.”

The statement then goes on to say, "From 1990 to 2017, employment in motor vehicle production declined by 22%, even though Americans are continuing to purchase automobiles at record levels. ... This investigation will consider whether the decline of domestic automobile and automotive parts production threatens to weaken the internal economy of the United States, including by potentially reducing research, development, and jobs for skilled workers in connected vehicle systems, autonomous vehicles, fuel cells, electric motors and storage, advanced manufacturing processes, and other cutting-edge technologies."

A notice will be published in the Federal Register announcing a hearing date and inviting comment from industry and the public to assist in the investigation, Ross said.

Contact Phoebe Wall Howard: 313-222-6512 or phoward@freepress.com. Follow her on Twitter @phoebesaid. Free Press Washington bureau reporter Todd Spangler contributed to this report.