By ANJANI TRIVEDI
The latest salvo in US President Donald Trump’s trade war promises to do more damage than good to an already-anxious American auto industry.
Trump on Wednesday ordered the US Commerce Department to probe whether auto imports threaten national security under Section 232 of the Trade Expansion Act — the same executive power he used to apply tariffs on steel and aluminium earlier this year.
The president’s latest idea risks unwinding a global supply chain that powers sales of almost 20 million cars a year in the US alone. Passenger vehicles and parts account for almost a quarter of the US$811 billion (RM3.23 trillion) US trade deficit in goods. The threat of tariffs also stands in stark contrast to China’s decision this week to cut import duties on cars and auto parts.
What’s often forgotten or ignored is that a car isn’t a discrete object — hundreds of parts from engines and steering systems to chassis and body frames go into making a vehicle. Few owners may sit around talking about their ignition coil or idler arm. But cars are the sum of their parts and, as a recent debilitating fire at a Ford Motor Co supplier shows, they matter. Together, autos and auto parts account for around 14% of all US goods imports, up 35% in volume terms from a decade ago, according to Nomura Holdings Inc analysts.
Sum of the Parts
Tariffs threaten rising US imports of auto parts, a key input for American and other carmakers.
Automakers have benefitted from the cost arbitrage of having parts made in China, Mexico or the European Union and imported into the US, especially at a time when squeezing expenses remains their primary goal (grand plans for electrification aside). For instance, the Mexican-origin content per American-made vehicle is around US$3,400 — up threefold in the past two decades. The sticker price on an average American car is
US$20,000 to US$30,000. Being able to lower costs on basic parts significantly raises automakers’ ability to invest elsewhere.
If Trump shuts out these components or makes them more expensive, the American auto industry will reel. For one, it doesn’t have the capacity or the cost-competitiveness to manufacture itself. Second, the Detroit Three automakers will be the biggest losers: They account for about 60% of Mexico-to-US export volume. General Motors Co (GM) imports more than 550,000 vehicles from Mexico — many of them pricey pickup trucks with high-value parts.
Tariffs are a percentage game — the higher the value of the car, the bigger the erosion to the bottom line. With trucks now accounting for more than 60% of sales in the US car market, any tariff risks compressing margins and hurting profits.
The auto and auto-parts industries have evolved within the existing trade rules and cost structure. Over the years, this has forced consolidation, with a few major players emerging for different components. For instance, the North American Free Trade Agreement (Nafta) requires vehicles to have at least 62.5% of their content made in the region to qualify for duty-free import to another Nafta country. This has created pockets of parts expertise in Mexico and Canada. Slapping tariffs on parts would also undermine US auto-technology ambitions. Sure, they would create a few thousand more jobs to produce components where American automakers lack expertise. But the flip side is the US would be left behind at a time the global car industry is trying to innovate to keep up with consumer tech demand. Retaliation could further dash hopes: Most advanced auto-tech suppliers have found lucrative and growing markets in China and Europe.
US automakers were the biggest exporters in terms of volumes from Mexico to the US in 2017.
Hina, for instance, now ranks third in US auto-parts imports.
Steering systems company Nexteer Automotive Group Ltd, headquartered in Michigan and listed in Hong Kong, is a large supplier to GM and Ford Motor Co. Fuyao Glass Industry Group Co is the largest maker of automotive glass and counts GM, Volkswagen AG, Toyota Motor Corp and Ford among its customers.
US automakers are already reeling under the rising cost of steel, which accounts for more than half of the 4,000lbs (1,814kg) weight of the average vehicle. The last thing they need is another round of enforced cost increases, just as the last thing consumers need is more expensive cars.
Trump’s erratic misfires on trade policy will do little to pull the American auto industry out of its misery. Instead, they may just lead to a breakdown. — Bloomberg
- This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.