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
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—The US even relies on China to supply combat uniforms and boots. I am at a loss to understand how we got here.–
There are so many “stealth” subsidies for 8,000-mile supply chains, beyond the usual suspects of regulation-labor arbitrage: exempting shippers from emissions regulations, local-state tax subsidies for US ports/cargo handling, commuters subsidize semi-trailers as commuters pay far more in fuel taxes per ton of road wear versus big rigs (road damage increases exponentially with the weight on top of each axle), etc.
But it’s a feature, not a bug as giving away money to shippers creates the illusion of more jobs. And your typical mid-term voter doesn’t care about international trade policy.
Federal Government purchasing of foreign goods could be stopped almost overnight:
https://en.wikipedia.org/wiki/Buy_American_Act
Waivers need to be approved to not buy American. It is my understanding that waivers went up dramatically under Reagan.
Key industries (chip making) that are used in almost every US military system moved overseas in the eighties despite warnings at that time.
Wolf Richter is saying that ‘consumers might balk at higher prices, and the (car) companies might end up with thinner profit margins’ so I was wondering. Car ownership, I believe, is already down in the US thanks to Wall Street helping cripple the earning power of the present generations of workers. If the profit margins became thinner due to car production being repatriated back to the US because of tariffs, would that not imply that during the next economic downturn that the car companies would have to be bailed out again because of a more precarious profitability?
Not noted, profit margins on any thing but trucks/suvs is razor thin.
that is the biggie. needs 100 asterisks.
As much as BMW might crow about tariffs on imported cars, the real money from its US operations is made from its SUVs assembled in South Carolina (X3 and X5).
Luxury cars also bring in quite a bit of money. Toyota doesn’t post its profits, but Lexus if memory serves is responsible for half its profits in the US, but only a bit more than 1 in 8 sales.
But yes, SUVs and Trucks are the main drivers of profit outside of the luxury market.
At the dealer level, there is little money in selling new cars. There is some money made in trade ins for used cars. The biggest source though is F&I (that’s Financing and Insurance), along with service.
I guess there would be a market as well for car parts that is profitable.
“the car companies would have to be bailed out again because of a more precarious profitability” – Or, we as a nation, could make the decision to push the losses onto shareholders and then onto bondholders and leave the taxpayer out of it.
Note that 25% tarrifs on imported pickups seems to have worked very well as there none today. all foreign car companies with pickups make them in the US. with NAFTA the domestics make almost all of theirs in the US. while they can switch assembly to US, parts would be a problem for months, never having to move production equipment which is doable, but will also time and money. now i dont see the domestics being able to absorb a 25% price increase, nor will consumers, the manufactures will blame Trump with a valid justification. the best they can do in the short term is decontent the Trucks, and suvs and cars. course Ford is getting out of cars this will make that happen a lot faster, and GM and FCA will follow quickly
25% tariffs on imported pick-ups in the US compared to non-Chinese companies can only produce in China via a joint venture with 50% owned by a Chinese (often state owned) partner.
China is still getting the better deal
Japanese companies also have promised to never import full sized trucks into the US.
Its important to remember, if not for Japanese imports, we would all be driving around in Oldsmobiles that would fall apart at 100,000 miles.
Well considering there are few countries where full size trucks are even a thing,so far they all made them local
Now comparing to Brexit, and there will be job loses in the UK, as they just dont have the car market to support their auto industry when they loose access to the EU, which seems to be the way they are going
It is a little more complicated than that. Honda Manufacturing of the U.K. exports 50% of U.K. production to the US. 15% is for domestic consumption with only the remaining 35% for the EU. Some export to Japan is undertaken, only around 2-3% at present due to capacity constraints (the US will take every Civic it can get right now as this is a hot model) and this could be expanded if EU sales falter, let’s say to 5-10%. So you’re looking at maybe a 25% reduction in output and that assumes a total collapse of sales into the EU, not exactly a definite outcome.
For Nissan, certain segments which are absolutely key such as small SUVs and the increasingly important EV market have a solitary source of supply, this being the U.K.
No doubt Brexit, especially a crash out, will cause a lot of reevaluating from these and other manufacturers. But even with the most frenetic of replanning it would takes several months just to work through the financial impacts of moving manufacturing. And that assumes you’ve a shovel-ready fully costed site somewhere in the EU27 all designed and ready to move to. That’s before we get to U.K. component manufacturers who might hold patents or manufacturing know-how which could want to remain U.K.-based — moving final assembly doesn’t solve this issue.
Not, please note, that I am saying everything will work out all nice and peachy. Just the opposite, I’d say. There’s going to be major changes and none of these are foreseeably to the U.K.’s advantage. But the results are going to be unpredictable and it’s not a good idea to think in absolutes, which I think is the point Wolf was making.
Lots of shenanigans going on with respect to the tariffs. I have a friend who buys steel and aluminum. His prices went up the day after the tariffs were announced which was weeks before they were actually implemented. Hmm….
I’m generally extremely cynical, but in this case it may not be anything overly nefarious. The scenario you described reminds me of how gas stations price their gasoline, which they sell at low margins from what I understand. When the oil companies announce a price hike, the gas stations immediately raise their prices, they don’t wait until the tanks under the pumps are emptied of the lower-priced gasoline first. Because the margins are so low, they need to raise prices now in order to have enough to pay the higher prices when they go to refill the tanks.
Thanks. That makes a lot of sense (both for gas and steel).
But do they react similarly to price drops?
‘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.’ — Wolf Richter
Such a radical shift is by no means a quick, frictionless process. Outfitting new or mothballed US plants means billions in capital to be raised, at a moment when equity in GM and Ford trades at a depression-level price-earnings ratio of about 6 (six).
Raising capital via debt instead would occur at the worst possible time, in a late auto cycle in which rising interest rates make subsidized low-interest loans ever costlier to already debt-burdened auto makers.
Moreover, higher wages in US auto plants inevitably will drive up vehicle prices. It’s anything but a “lower-cost option,” and auto makers aren’t going to absorb the margin hit — they can’t afford to.
If this is hysteria, I’ll own that, as I reach for my
revolvermegaphone to amp up the volume. A war on trade will unleash a global depression that will be worse than one can possibly imagine. When we reach the “dry heaves” stage in the early 2020s, I’ll be the one who turns bullish when hysteria has become the conventional wisdom.Raising capital via debt instead would occur at the worst possible time, in a late auto cycle in which rising interest rates make subsidized low-interest loans ever costlier to already debt-burdened auto makers.
What are you saying here, Jim? Sounds like this: Having borrowed at artificially low interest rates for a decade to mothball american plants and build foreign plants to arbitrage cheap foreign labor or buy back their own stock, these ostensibly “american” companies are now too debt-encumbered to actually do business in the us making products that their unemployed former employees can no longer afford at prices that produce a profit margin that is acceptable to wall street.
Did they really think this could go on in perpetuity without blowback? One would think that a cardinal capitalist rule would be to destroy your own customer base judiciously, lest you run up against another capitalist tenet–creative destruction.
A traditional way that companies weather recessions is to slash capital spending, as an alternative to laying off even more employees. But if forced to borrow for capital investment when markets turn hostile, they will pay a high price for that debt, or possibly fail to get it underwritten at all.
Whatever the merits of repatriating production may be, it’s impossible to get from here to there without a recession. With a multi-year phase-in, it might (just) be feasible. But Trump operates in meat-ax fashion. And so will the markets when Bubble III smacks the wall.
Bubble the third is gonna pop regardless, and my take on bubbles is that the sooner they pop, the better (since they keep growing til then).
Also, I honestly don’t understand how the problems you describe couldn’t be offset with fiscal stimulus when the inevitable crash does come. I mean, infrastructure alone in this country is utterly nuts. If we actually did what it took to bring that into the 21st century, it would take decades and create bazillions of decent jobs. Then maybe people could actually afford to spend a bit more for stuff. My admittedly very amateur understanding of economics also makes me want to say that it would actually be better to invest heavily in such things when the global economy isn’t overheating like a frog in boiling water.
Are you sure about this. I started looking this up and cannot find any indications it is true. This idea seems to have come from the use of an exception in the law which allows small purchases in times of great need where the US suppliers are running behind.
This link (dated 2012) says it is US law that the uniforms be made in the US.
http://www.politifact.com/rhode-island/statements/2012/sep/02/anthony-gemma/anthony-gemma-asks-why-us-military-uniforms-are-ma/
Whether uniforms or other imports, my tinfoiliness indicator keeps flashing Web of Detente as one of the key rationales for all that ExIm and FDI activity. The under-appreciated risk is in the concentration of strategic suppliers or sole-source situations. (Say out loud for full impact of that scary sibilance!)
Just because there is a law on the books in no way prevents the US government from getting a waiver or just outright ignoring it until caught.
Here’s an article from ABC reporting on the issue.
Unlike Snopes, politifact is often horribly unreliable and often enough is wrong from lazy reporting or trying to advance a both sides do it horse race picture.
“Reshoring” of auto components and whole-car assembly to the States would only make sense if “costs” were reduced to up margins…and what is the go-to tactic adopted by US companies for “cost reduction”? Of course, it’s to lower labour input, by either high degree of automation, or pay cuts. And given the successes seen by the Right to destroy union protection accorded to workers, amongst other ploys that derogate worker rights, significant lowering of wages clearly is within the grasp of the major automakers, and bringing back some/much of the off-shored production of vehicles and parts in such an anti-labour climate becomes more feasible. Another potential victory for Trump and MAGA, Harley-Davidson notwithstanding!
An alternate, equally plausible outcome is that Herbert Hoover Trump achieves the remarkable feat of pushing General Motors into a second bankruptcy, just as his Republican namesake sealed the fate of Stutz, Duesenberg and Pierce-Arrow by 1932.
You heard it here first.
*dons goggles for a spin in the Bearcat*
Harley Davidson already has manufacturing plants in Thailand for the Asia market and Brazil for the the South American market and was considering a move to the EU before Trump’s tariffs.
Suspect the thing were over looking is the parts tariffs, as even if you dont buy a new car, at some point you will needs to fix your car, and that will now cost you a lot more than before
But China itself is reliant on the US for chip tech and design I believe, otherwise why the big brouhaha over ZTE?
I remember during the 1980s to 1990s there was a huge uproar over uncle Sam relying on Japan for missile guidance chips. If China becomes a problem, the US should just switch to Japanese companies. It’s hard to believe that Japanese companies have been idle since.
I have long and often said . . . .
An oHIo Honda is MORE aMERican than a MEXico Ford.
Volvo just opened a plant in South Carolina to manufacture the new S60, and will start SUV manufacturing there in 2021. But Wolf’s larger point stands, clearly the tariffs are perceived as a threat to their strategy because the CEO has been very vocal in opposing them.
“they” “could eventually pass on the higher costs to consumers”
Could happen, maybe. Or the dividends to shareholders might be reduced, along with CEO compensation….
Don’t you just love the *might*s and *maybe*s !!! BOO!!!
Resilience is indeed something that countries as well as businesses have tossed on the pyre. More of it would add a great deal of security to nations and companies and, thus, to their people.
An enormous amount of trade is intra-company trade. So much of what Mr. Trump is doing will hurt US firms regardless. Before it sold off Vauxhall and Opel, for example, one GM subsidiary in Spain, another in Germany and yet another in China might sell to Vauxhall in the UK, where the final product was assembled.
Let’s also be aware that companies are unlikely to let an explanatory crisis go to waste. It would be common corporate behavior to blame already desired changes on some opportunistic external cause, such as a presidential directive, so as to redirect blame.