By Dennis Desrosiers
The US Administration Threat of Tariffs on Light Vehicles
In what appears to be a retaliatory measure against Canada and other nations for standing up to the US President at the G7 meeting last week the US administration has asked the Department of Commerce to access whether vehicle imports pose a ‘security threat’ to the US and if so to implement a 25 percent tariff. Although most of the speculation is they would apply this tariff against vehicles coming from Canada ( Prime Minister’s Trudeau’s post-conference remarks particularly irked the President ) the nature of the inquiry would mean that they would have to be applied against other nations as well and in particular Mexico. It is possible that some vehicle-producing nations would be exempt but unlikely especially since the US Administration has been very critical of vehicle imports from the EU. There has been no mention of Japan and Korea. Any analysis of the impact of these tariffs, therefore, has to assume that the tariffs would be applied on a multilateral basis.
Light vehicle imports into the US last year amounted to $181.2 billion with Japan the number one importer with $42.8 billion, Canada second with $42.5 billion, Mexico third with $29.8 billion, Germany fourth with 23.0 billion and Korea fifth with $15.7 billion. Imports from any other country were less than $10 billion last year. No unit volumes are available but a good estimate would be around 7 million units were imported by the US last year. We do know that the average transaction price of a vehicle in the US is about $40k with a duty paid value of about $25K although European units would be substantially above that level and others below that level. Understanding the wide variation, a 25 percent duty would amount to between $5K and as much as $15K per vehicle and average about $6K to $7K per vehicle. A duty of this size would pretty well kill most sales of these imported vehicles so upwards or 7 million units would be affected if the duty was applied on a multilateral basis across the entire market which is likely.
From a purely Canadian perspective, we produced 2.3 million vehicles last year and about 85 percent of them were exported to the US or about 1.7 million vehicles. Every OEM producing vehicles in Canada would be affected by this tariff. The Detroit three export upwards of about 90 percent of their vehicles to the US, Toyota exports between 70 and 80 percent and Honda between 60 and 70 percent.
So the first observation is that this tariff would hurt US-based companies ( we still consider FCA a US-based company ) more than the two Japanese based companies although all companies in Canada would be seriously compromised. If leveled on a multi-lateral basis virtually all companies in the global automotive sector would be affected.
Second, there is a view that this tariff would result in more vehicles being sourced from US plants and thus some job creation in the US would result. This is false thinking in that most US plants are running at or near full capacity. There might be 2 to 3 million added units that could come from existing US plants but this would come at added costs due to the need to run significantly over time. It is also questionable whether the vehicles produced in the US would or could replace the vehicles being imported since the types of vehicles imported are radically different than the vehicles produced in the US. Luxury vehicles are a good example. Entry-level vehicles being another. But even if some of the lost imports could be replaced with domestic production the prices paid by Americans for these vehicles would be substantially higher for a number of reasons … overtime, supply, and demand, pricing to the tariff etc.
Third, it takes 2 to 3 years to design and build an assembly plant and another year or two to get it up and running efficiently so in the near term there would be virtually no ability to move plants to the US from other countries including from Canada and Mexico. Knowing that there is the possibility of a change in Government in 2020 it is also unlikely that any OEM would push the button now but instead they would wait and try to use other methods to bring this situation under control. It is very expensive to close an assembly plant so that would be their last option.
Fourth, as mentioned Canada produces between 2 and 2.5 million vehicles a year and the majority of the components to build these vehicles come from US parts suppliers. Last year Canada imported about $30 billion in components from the US which would translate into between 20K and 25K component jobs in US factories. With the loss of most of Canada’s vehicle production, most of these component jobs would be displaced so the US components industry would be seriously hurt by just the impact on Canada. Extend the impact on the US components industry across all nations and the job losses would be north of 40 thousand. The US exported north of $60 billion in components last year.
Fifth, with the loss of close to 2 million units from Canada and upwards of 7 million units from all countries there would be a very serious shortage of vehicles for sale in the US. Less supply in a market of 17 million units would definitely lead to an increase in the prices of ALL vehicles for sale in the US. The OEMs would be foolish not to ‘price to the tariff’ which always happens when tariffs are applied. Higher prices together with a lack of supply would result in a possible collapse of the US light vehicle market. We do not know how much but it is possible that it could decline by at least 4 or 5 million units and possibly more. This would be devastating for the US dealer body which employs about 1.5 million Americans. Again we do not know how many employees would be affected but a loss of 4 to 5 million sales would translate into at least 200 to 300 thousand job losses in the American dealer network.
Sixth, a collapse in the US vehicle market would not only affect imported vehicles where the duty is applied but also domestically produced vehicles. Domestically produced vehicles could decline by a few million units alone. The US production of vehicles and components employ about 600 thousand workers so a decline in domestically produced vehicles would result in upward of an additional 100K of these workers losing their jobs over and above the ones I’ve already mentioned.
Seventh, the auto sector in Canada and Mexico would be decimated. In Canada, we employ about 50 thousand workers in our assembly plants and another 100 thousand in our component plants. The assembly sector would lose upwards of two-thirds of their jobs but there would be less of an impact in our components sector since they export most of their goods to the US. The lost jobs in the component sector in Canada would likely be in the third to the half range so somewhere between 30K and 50K jobs. Together with assembly jobs, Canada could lose upwards of 100K jobs. I have no idea what the job losses would be in Mexico and other countries but they would be significant especially for Mexico.
Eight, during the financial crisis where GM and FCA declared bankruptcy in the US one of the biggest fears was the collapse of the entire US automotive sector. If these companies failed entirely many if not most suppliers could not survive and their failure would likely domino with the possible collapse of Ford and some of the new domestic assembly plants in the US. and domino even further with the closure of many component plants other than those affected by the GM and FCA bankruptcy. A 25 percent tariff could have the same effect. It is possible that many US component suppliers could not persevere a significant and protracted US downturn and this could domino across the entire industry resulting in tens of thousands of additional job losses.
Ninth, the most significant employment losses would come from the indirect job losses. We know that one in seven jobs in Canada and in the US are tied directly and “INDIRECTLY” to the automotive sector. These are what I call the ‘butcher the baker the candlestick maker jobs … auto workers obviously are high paid and create a lot of indirect jobs with this income. Direct job losses in the US if you add the above numbers would be in the 300K to 400K range, in Canada upwards of a 100K jobs and in Mexico, it would likely be higher than the Canadian numbers but less than the American numbers. This would translate to at least a few million additional indirect jobs in the US and as many as an additional 500K indirect jobs in Canada. Whose knows about the impact on Mexico.
Tenth, the Canadian and other Governments would surely retaliate against this tariff. And interestingly it unlikely would be with tariffs on American vehicles. Agriculture products from the US would be a more likely target. So Canadian automotive consumers would have a little negative impact although higher prices would also flow through to Canada and cause some disruption. But agricultural workers in the US would be hurt badly. I have no idea of the potential job losses.
Therefore the negative impact from a US 25 percent tariff on light vehicles is so devastating to the US, Canada and Mexico it is hard to imagine that it could come forward. Why would the US Administration want to punish US consumers and US automotive and related workers? In addition, election wins in Michigan, Indiana, Wisconsin, and Ohio ( the core of the US auto sector ) propelled the Republicans to victory in the last general election. I can’t imagine Republicans in the US Congress and or the Senate accepting the negative implications of this proposed tariff if they hope to hold their position in these states.
I do not know how Canada should respond to this threat but it is important to stay calm. As mentioned the biggest loser in this situation will be the US consumer and auto and related workers so although it takes a leap of faith, perhaps the best strategy is to let the US figure this out for themselves. Even a high school economics student can determine how negative it will be for the US certainly the brains in Washington can do so as well.
That being said the White House is totally unpredictable so we have to take this threat very seriously.
My rant for the day.