U.S. carmakers and their overseas rivals have strong enough credit to withstand the strain on sales and cash flow that would result from President Trump’s proposal to add 25 percent tariffs on automobile imports, according to corporate credit-ratings firm Fitch.
The duties, which the White House is considering amid an escalating trade dispute with both U.S. allies and competitors, are opposed by both automakers relying on global supply chains as well as American neighbors who benefit from them.
“We believe the auto-tariff threat supersedes other trade-related concerns and raises credit risk for the entire automotive sector but do not expect increased tariffs to necessarily result in widespread ratings downgrades, given the credit profile of the industry is much stronger today than it was during the global auto crisis of 2008-2009,” Fitch analysts including Stephen Brown wrote in a report Friday.
Economists have cautioned that the White House’s protectionist moves and the threats and counter-threats accompanying them risk sparking a trade war that will undermine the economic benefits of last year’s tax cuts and potentially spark a global recession.
Trump has shrugged off such concerns, maintaining that trade wars are “easy to win,” and moved ahead Friday with levies on $34 billion of Chinese imports, prompting immediate retaliation from Beijing. The White House had earlier threatened tariffs on as much as $500 billion of Chinese goods, under Section 301 of a 1974 law empowering it to address unfair trade practices, unless it can strike a deal with President Xi Jinping.
The auto tariffs would be imposed under a different statute, Section 232 of the 1962 Trade Expansion Act, that allows Trump to justify such measures on national security grounds. He has already used the provision to impose duties of 25 percent on steel imports and 10 percent on aluminum, spurring a so-far unsuccessful push in the Senate to require Congressional approval for such actions.
The impact of a 25 percent surcharge on imported vehicles, not counting parts, might reach $47 billion a year, Fitch said, based on its projected sales of 16.8 billion vehicles this year. While the industry might ease the effects by moving more production to the U.S., American plants are running at full capacity already and building new ones would be costly and time-consuming, Brown wrote.
On the upside, the Big Three U.S. automakers are healthier now than in past recessions, a downturn that led to pre-packaged bankruptcies for both General Motors and Chrysler, which merged with Italy’s Fiat.
[Related: GM warns Trump tariffs may force production cuts, layoffs]
BMW, Mercedes-parent Daimler, and Volkswagen have solid profit margins for their respective ratings “and could sustain moderate pressure on profitability and cash flows” without hurting their profiles, Fitch said.
Toyota, Honda, and Nissan also enjoy financial health, though “tariffs would pressure margins at a time when Japanese carmakers are struggling with lower sales in the U.S.,” Brown and his colleagues noted.
Fiat Chrysler has fallen 10 percent in New York trading since Trump proposed the automotive duties in late May. Ford rose 3 percent in the same period, while General Motors climbed 9.6 percent to $39.20.
Detroit-based GM operates 47 car plants in the U.S, where it employs about 110,000 people. Setting tariffs that make its supplies more expensive and spark higher levies on its exports “could lead to a smaller GM, a reduced presence at home and abroad for this iconic American company, and risk less — not more — U.S. jobs,” the company said in comments submitted as part of an investigation required before the duties can be imposed.
“The threat of steep tariffs on vehicle and auto component imports risks undermining GM’s competitiveness against foreign auto producers by erecting broad brush trade barriers that increase our global costs,” the company said.
