One of the Trump administration’s most unpopular ideas, tacking tariffs onto automobile imports that would jack up their prices, might nonetheless accomplish what the president envisions: strengthening the competitive edge of the best-known American carmakers.
The reason: General Motors, Fiat Chrysler, and Ford have the most unused vehicle production capacity in the U.S., meaning they could respond more nimbly if President Trump’s 25 percent tariffs on imports prompted a drop in demand, said Colin Langan, an analyst with the Swiss lender UBS.
The U.S. sells about 3.9 million cars a year that are built outside its borders, and currently idle plants in the country could produce about 3.8 million, according to a UBS report analyzing the potential impact of the duties. With Detroit’s “Big Three” controlling factories that account for about 2 million of that total, they could not only compensate for lost sales of vehicles they themselves produce overseas but capture purchases that might otherwise have gone to competitors such as Mazda and Nissan.
“They may be able to gain share,” said Langan, who has a “buy” rating on Ford, GM, and Fiat Chrysler. “Our analysis indicates winners will be original equipment makers with enough excess capacity to cover a volume shortfall due to vehicle tariffs. The Detroit Three look the best positioned.”
The odds of U.S. vehicle tariffs may rise if Trump succeeds in winning a trade deal with China during a recently negotiated truce, as well as enacting the revised North American Free Trade Agreement, suggested Chris Krueger, an analyst with Cowen Washington Research Group. “Trump and his team believe that tariffs — both threatened and implemented — are primary reasons” for progress with China, Mexico, and Canada, Krueger said.
However, any competitive edge for American automakers gained from tariffs would come with a heavy cost. Carmakers headquartered in the U.S. and overseas have warned that Trump’s tariffs would curb profits, potentially cause layoffs, and drive up consumer prices.
If imposed, they would further complicate the challenges of already higher prices for American steel and aluminum, as well as a shifting auto market. Climbing demand for sport-utility and electric vehicles has prompted GM and Ford to realign U.S. production, with GM alone idling five North American factories and laying off roughly 14,000 workers.
The market value of all three Detroit automakers declined in the last three months of 2018, with both Ford and Fiat faring worse than the broader S&P 500, which tumbled 14 percent.
Adding duties to cars and car parts “will put American workers, consumers, communities, and the economy at risk,” Rick Schostek, the executive vice president of Honda North America, told members of the Senate Finance Committee in late September.
American carmakers, including GM, and foreign manufacturers, such as BMW and Volvo, previously told the Commerce Department during a mandatory public input period that the duties would increase the prices of vehicle parts, trim American exports, and, ultimately, cost the very well-paying jobs that the president has promised to increase.
“Import tariffs could lead to a smaller GM, a reduced presence at home and abroad,” and thus fewer manufacturing positions, GM told administration officials. The potential risk from the duties grows, the company said, when combined with Trump’s further trade disputes with China and traditional U.S. partners in Europe.
Across the U.S. auto industry, a 25 percent tariff would trim output by 1.5 percent and cost 195,000 workers their jobs over a one-to-three-year period, according to the Auto Alliance, a trade group representing companies behind 70 percent of all U.S. auto sales. Buyers of imported cars would pay an average of $5,800 more, costing American consumers about $45 billion, based on 2017 sales data.
Trump has largely dismissed tariff worries, however, including concerns that his protectionist policies on steel and aluminum imports would undermine the benefits of 2017’s tax cuts.
“I’m a tariff man,” he said in a Twitter post last month. “When people or countries come in to raid the great wealth of our nation, I want them to pay for the privilege of doing so. It will always be the best way to max out our economic power.”
[Also read: USMCA deal may pressure White House to add auto tariffs too]
