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Automakers Oppose Tariffs: Will Trump Administration Yield?

Ritujay Ghosh
Domestic automakers will suffer equally if tariffs are imposed on car imports, as a number of U.S. carmakers have their production units offshore.

Auto groups and foreign governments vehemently opposed the idea of tariffs on imported cars at a hearing held by the Commerce Department on Jul 19. President Donald Trump’s plans of imposing tariffs on imported cars haven’t gone down well with automakers, who feel it will hurt the U.S economy.

Moreover, officials from the European Union (EU) commission are reportedly finalizing a list of goods that will be subject to tariffs in response to the United States’ tariffs on EU cars. Domestic carmakers, on the other hand, are already suffering, with China having imposed retaliatory tariffs on U.S. goods that also target the auto industry.

Auto Industry Opposes Car Tariffs

On Thursday, The Alliance of Automobile Manufacturers, whose members include General Motors Company GM, Ford Motor Company F, Fiat Chrysler Automobiles N.V. FCAU, Volkswagen AG VLKAY and Toyota Motor Corporation TM, warned the Commerce Ministry that tariffs would severely hurt the auto industry and the global economy.

Foreign carmakers have been reeling under fear since Trump, in May, ordered for a probe to scrutinize if car imports are posing a threat to national security and that it could lead to tariffs of 25% on imported cars. A study by a U.S. auto dealer group reveals that tariffs on cars could cut domestic auto sales by 2 million vehicles annually and cost more than 117,000 in auto dealer job cuts, which is 10% of the workforce.

The group also said that 25% tariffs would raise the price of U.S. vehicles by $83 billion annually. Understandably, tariffs will not only raise the price of cars but also lead to huge job losses that will deal a severe blow to the U.S. economy.

Worrying Times for Domestic Carmakers

Domestic automakers will suffer equally if tariffs are imposed on car imports, as a number of U.S. carmakers have their production units offshore. General Motors sold 3 million cars in the United States in 2017. However, it produced only 2.2 million cars on home turf, which means it imports thousands of cars. General Motors has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Jennifer Kelly, research director of United Auto Workers union, on Thursday said that U.S. auto production has declined to 11.2 million vehicles in 2017 from 12.8 million in 2000, with jobs shrinking by 400,000 over that period, as many automakers have shifted production to Mexico or other low-wage countries.

Tariffs to Hurt Domestic Automakers

Domestic automakers are feeling the heat of China’s retaliatory tariffs with a number of companies mulling over shifting production out of the United States, while others are planning price hikes. Tesla, Inc. TSLA has hiked the prices of its Model X and S cars in China by 20% each. Bayerische Motoren Werke Aktiengesellschaft BMWYY and Daimler AG DDAIF, which make cars in the United States and sell in China, too have hinted at raising prices.

On the other hand, Harley-Davidson, Inc. HOG last month said that it will move part of its production out of the United States to avoid EU tariffs. General Motors too will be making its new Chevrolet Blazer at its Mexico plant. The decision could help General Motors avoid EU and China tariffs. However, it could also prove costly for the company as importing those vehicles back to the United States might attract higher tariffs.

Bottom Line

Understandably, the trade spat between the United States and China, EU, Mexico and Canada now looks more like a double-edged sword. While producing vehicles in the United States could lead to higher tariffs in China and the EU, producing vehicles in Mexico and Canada and importing them back to the United States could mean paying higher import duty.

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