United States President Donald Trump’s latest tariffs on the auto sector have made one thing clear, experts say: The US is no longer a beacon of free market trade, and businesses need to switch to the reality of “America first”.
On Wednesday, Trump announced 25 percent tariffs from this Thursday on all cars, light trucks and auto parts imported into the US, a move experts called “devastating” for the industry.
Almost half of the 16 million cars sold in the US last year were imported with a total value exceeding $330bn, according to news reports quoting Goldman Sachs analysts.
It is not clear whether the tariffs will go into effect as laid out in Trump’s latest announcement or if there will be exceptions or any rollback.
“But one thing we know for sure”, said Ilhan Geckil, senior economist at the Anderson Economic Group (AEG), is that “Trump’s policies are protectionist and not free market and free trade the way that the US has done [things] for decades. Now that’s shifting. … That’s the new rule, and companies have to play accordingly and will have to increase business presence in the US.”
Some car manufacturers, including South Korea’s Hyundai and Kia, have announced plans to boost production in the US.
While that gives the impression that Trump is right to argue tariffs will force manufacturers to produce more in the US, the full picture is more complicated, Geckil said.
“The US really is the best in terms of the size of the market” and accounts for nearly 25 percent of global auto sales, Geckil said, explaining why automakers do not want to lose access to the US market.
But the reason a lot of manufacturing moved out of the US was to take advantage of lower prices and cheaper goods.
Bringing manufacturing back to the US will lead to higher prices for their products, hitting demand, he said.
“Prices are going to go up significantly, and that will have a spillover effect,” Geckil said, adding that he expects to see higher sticker prices within a month or so of the tariffs kicking in.
“A $50,000 vehicle will become a $75,000 to $80,000 vehicle in a couple of years, and that price hike is going to stay there forever,” he said.
That, in turn, will eventually lead to job losses, contrary to Trump’s stated goal of protecting American workers, Geckil said.
As per an earlier estimate by AEG, tariff proposals floated by Trump in February would raise the price of a car assembled in the US, Canada and Mexico from $4,000 to $10,000 for most vehicles and $12,000 or more for electric vehicles (EVs)
The estimate did not include the impact of retaliatory tariffs that other countries might impose.
In addition, Trump’s 25 percent tariffs on steel and aluminium, which kicked in on March 12, are expected to increase prices of conventional engine vehicles by $250 to $800 and those of EVs by $2,500 or more, AEG previously said.
AEG said the measures unveiled on March 26 would be “much more costly” for European- and Asian-manufactured cars than its previous estimate and potentially more expensive or less expensive for North American-produced vehicles.
Ford CEO Jim Farley told employees in an email on Friday that “the impacts of the tariffs are likely to be significant across our industry – affecting automakers, suppliers, dealers and customers,” the Reuters news agency reported. He gave the warning even though about 80 percent of Ford vehicles sold in the US are assembled domestically.
Integrated industry
One reason auto tariffs have such a wide-ranging impact is because the industries of different countries are so deeply intertwined.
In North America, the US and Canadian auto industries have been broadly integrated since the 1965 signing of a pact that facilitated the duty-free movement of vehicles and parts, said David Adams, president and CEO of Global Automakers of Canada.
That was followed by free trade agreements in 1989 and 1994 that bound the industries of the two countries and that of Mexico more closely together.
Over the years, the three countries have built up specialisations for certain auto parts, partly driven by costs, Adams said.
For instance, the Canadian dollar is typically lower than the US dollar and since Canada has a public healthcare system, employers usually do not have to bear health insurance costs for their workers, making it cheaper to do some work in Canada over the US.
For a vehicle made in Canada, half the parts would come from the US, and for one made in Mexico, 30 percent to 35 percent of its parts would be from the US on average.
“By tariffing Canadian vehicles you’re effectively tariffing American suppliers,” Adams told Al Jazeera.
Since Canada and Mexico – and all other nations that the latest tariffs apply to – are likely to retaliate, prices will almost certainly spiral further.
“We don’t want to cut off our nose to spite our face, but what we’re looking at hurts everybody. … Because of the high degree of integration, the impact will be to a same degree on both sides,” Adams said.
The tariffs on auto parts, which do not apply to components deemed to be “US content”, complicate things even further.
In car production, raw materials are typically turned into a component in one jurisdiction before being folded into a larger component or components elsewhere. It is common for parts to cross borders three to five times per vehicle.
In practice, this means the tariff burden may vary wildly for different companies and different vehicles.
“It is highly confusing and complex,” Adams said.
“Trump’s desire seems to be not to have a Canadian auto sector. But that would cost $50bn to $60bn to relocate everything to the US. This is not a short-term proposition. We’re ultimately looking for a long-term solution that creates stability not just in the auto sector but in the North American economy, so we can focus on doing business.”
That solution needs to include Mexico because a globally competitive auto industry needs a low-cost region for carrying out the most labour-intensive parts of the manufacturing process, Adams said.
“Part of the current challenge is that [Trump] is looking at the auto industry from a myopic view of the auto sector as an American industry rather than a North American industry,” he said.
Adding to the uncertainty hanging over the sector is Trump’s pledge to impose “reciprocal” tariffs on all countries and specific duties on Canada and Mexico over their alleged failure to stem the flow of fentanyl and undocumented immigrants into the US.
Some of Trump’s claimed rationale for the tariffs is based on “false” information, given that little fentanyl flows from Canada to the US, said Brett House, an economics professor at Columbia University’s Business School.
“The so-called data that the Trump White House has is absolutely false,” House told Al Jazeera, adding, “and that makes it clear that these tariffs were never about those things.”
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