The current US administration has wasted no time in rewriting trade rules, following through with the election promises of the current president of the United States. US import tariffs which were previously only threatened have now been implemented on products from around the world. While these efforts are intended to benefit the US and improve its manufacturing front, the effects of these tariffs have been positive for neither the United States, nor for some of its strongest allies. Not only have these steps resulted in retaliatory tariffs from countries such as China and Canada, they have also created challenges for domestic businesses, as foreseen by economists.
The automotive industry is facing emerging issues as the US considers increasing tariffs on imported vehicles. The proposed auto tariffs could be as high as 25% and are almost unanimously opposed by both foreign and domestic manufacturers. Studies by multiple financial and automotive institutions point to higher costs for American consumers and manufacturers, as well as several hundred thousand lost jobs. Meanwhile, automobile manufacturers in other countries also face the daunting probability of having to offset higher costs and lower sales to stay afloat.
Canada is one of America’s largest trading partners and a significant exporter of vehicles, while Mexico is home to many manufacturing plants upon which American consumers have so far been dependent. Trade experts think that these countries may end up being exempt from the tariffs, but are likely to face a substantial hit to their economies if they are not. It is also no secret that American consumers have long preferred the precision-driven models from European countries such as Germany, and the EU is another trade entity likely to suffer from the tariffs on their American exports. Japanese makes, once common on American roads, and South Korean brands will also bear the brunt of trade tariffs planned or implemented.
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International outlook: Could Canada be in trouble?
Canada produces over 2 million cars a year, but only about 10% of those are sold to Canadians. Industry experts estimate that production could fall by as much as 600,000 to 1,000,000 units as a result of US import tariffs, costing up to 160,000 jobs in the automotive industry. This would hit Ontario particularly hard, and possibly even send the province into a recession. While auto tariffs are expected to cause the loss of 1 in 10 automotive jobs nationally, in Ontario the number will be closer to 1 in 5.
According to the CBC, the TD bank estimates that estimates that $74 billion in automotive exports would be subject to tariffs, and the country’s GDP could fall by 0.4% within a year. This, in turn, would permanently impact investments in the country, leading to long-term economic consequences. The Canadian dollar will not be exempt from its effects and is expected to fall by a much heavier 8% to 15%.
Although verbal feuds between the United States President Trump and the Canadian Prime Minister Trudeau may be concerning, economists still think that negotiations will lead to a compromise between the two nations, especially given their membership in NATO. If an agreement cannot be reached, however, Canada can expect a long-term impact on its economy.
International outlook: Is Germany likely to be hit hard?
The EU is the largest exporter of motor vehicles in the world, and the United States is its biggest market. The proposed tariffs could reduce earnings by 7% to 10% for the region’s leading manufacturers, including BMW and Daimler. Volkswagen, the biggest automobile manufacturer in the world, has already seen a drop in its shares as a result of the tariff threat.
Germany stands to be hit the hardest of all EU nations, as it accounts for nearly half of Europe’s automobile exports to the US. German manufacturers are set to lose money on every vehicle sent to America. While companies can absorb some of the costs and with difficulty, pass some on to their customers, sales and profits will still fall. Investors are already beginning to avoid this industry because of the expected losses, further impacting vendors.
In the long term, manufacturers from Germany and other European countries might relocate to China or change their American factories to better cater to US demand, but this process will require time and money, meaning that these businesses are facing a rough couple of years if the US import tariffs are implemented. This is assuming that the tariffs are not then passed on to China in the future, which is a real possibility since the US has already imposed tariffs on several Chinese product categories.
For the EU as a whole, a rise in the US dollar could offset losses from the auto tariffs. However, if the Euro remains strong, an increase in USD would not be enough to make up the difference.
International outlook: Uncertain future for Japan and South Korea?
Japan’s automotive industry has billions of dollars invested in American plants, and accounts for roughly 40% of vehicle sales in the country. Toyota, Nissan, Honda, Mazda, Subaru, and Mitsubishi together sold close to 7 million vehicles in the US in 2017, half of which were made locally. A 25% automotive tariff is estimated to cause losses of over $20 billion for Japanese companies, over half of the expected profits for this fiscal year.
South Korean companies face substantial losses as well: manufacturers such as Hyundai and Kia could take a financial hit equivalent to 80% of their 2017 pre-tax profits, over $4 billion. Hyundai says production costs would rise by 10%, and the tariffs would weaken the country’s economy. South Korea’s automotive industry accounts for 13% of its total exports.
The country has reportedly requested an exemption from US tariffs on the basis of a security alliance and trade agreement the two nations formed in March, and it is unlikely that American policymakers can now deny it.
American automotive industry opposes tariffs
While the proposed auto tariffs are intended to protect the US economy, businesses and analysts argue that they will cause more harm than good. The Alliance of Automobile Manufacturers, which includes industry giants such as Toyota, Volkswagen, and GM, predicts that the tariffs will raise the price of US vehicles by a total of $83 billion annually and cost hundreds of thousands of jobs.
The Center for Automotive Research predicts that the price of new cars will rise by $455 to $6,875 depending on the severity of the tariffs. Used cars will become more expensive as well, as demand for them will rise and supply is set to fall. Automotive components will also rise in price, increasing the cost of repairs and maintenance.
Even American manufacturers will be unable to benefit from the proposed US import tariffs, as the majority of them rely on parts from outside the country, and many assemble vehicles internationally as well. The Center predicts that demand in the automotive industry will fall by anywhere from half a million to 2 million units, driven both by higher costs and by the loss of jobs.
All in all, US import tariffs on vehicles and components are expected to create losses for manufacturers and countries around the world, as well as for individual citizens. The American government has yet to make a decision, however, with U.S. Commerce Secretary Wilbur Ross saying that it is too early to say whether these tariffs will be imposed or to what extent. As of July 25, the US and EU have agreed to hold more talks to reduce trade barriers, and both sides will defer the implementation of any new tariffs, including ones on vehicles. American and European automakers will doubtless be following these talks closely.
As the United States continues to negotiate trade agreements and impose tariffs, many sectors and economies are in flux.
Keep following Technavio’s experts for more insights into what vendors and industries around the world can expect from these developments.