Dem
47
GOP
53
Donald Trump's constant threats about tariffs are making one important industry, the auto industry, very nervous. First there are the tariffs on steel and aluminum. Cars are made from steel and aluminum and some of it comes from abroad, where it is cheaper. If the raw materials for making cars go up in price, the price of cars is going to have to go up. That will make imported cars from Europe, South Korea, Japan, and other countries more competitive. Also, a higher price may convince some potential customers to stick with their old car longer, or to buy a used car.
Second, there are the tariffs on imports from Mexico and Canada. The problem here is that many of the parts used in cars, including nonmetallic parts, come from these countries. A 25% tariff on them will also force automakers to raise prices. Even more complicated is that some parts are made of subparts and the partially assembled part goes back and forth across either border multiple times during the assembly process, incurring tariffs on the full value of the part each time. In Europe, all countries have a value added tax, so if a part that goes from country A to country B is worth, say, €14, and it later comes back worth €15, the taxable value upon reentry into country A is €1, not €15.
The supply chains for U.S. automakers are completely integrated throughout North America, as a result of NAFTA and USMCA. Every step is done where it can be done most cheaply, without regard to which country the company doing that step is in. For the auto industry, deciding between having some step done in Detroit or Mexico City is no different than deciding whether to have it done in Detroit or Kansas City. Price, shipping costs, quality, and ability to deliver on time are what matter, not the country where the factory is located.
Tariffs are upending all the carefully optimized supply chains. Finding new suppliers who can deliver complex parts to exacting standards on time is not something that can be done in a hurry. Furthermore, car makers don't want to scramble to create entirely new supply chains only to have Trump change the tariffs in 3 months and make their new arrangements uneconomical. This uncertainty is killing them. They want predictability so they can make long-term plans.
Another issue is all the paperwork that would be needed to figure out the tariff each time a part crosses a national border. If GM owns a factory in Mexico, it may not even bother to keep track of what the semifinished part is worth each time it goes back and forth across the border. A whole new accounting infrastructure might be needed to keep track of what parts are worth at each step in order to pay the tariff. Needless to say, there will be a great temptation to value the part at a very low value until the final step in Detroit, when a decal is applied saying the part has been approved. Bingo, it is suddenly worth $50, whereas the same part imported from Mexico this morning without the decal was declared at a value of $3—after all, that part hadn't been approved so it wasn't worth much. Consequently, the amount of money raised by the tariffs may not be as big as Trump expects. On the other hand, clever accountants will be able to demand and get hefty pay raises.
The bottom line here is that although the tariffs might create some jobs in the U.S. steel industry, they could destroy the U.S. auto industry (which is far, far bigger than the steel industry) due to making U.S.-made cars more expensive than imported cars. Trump never thinks these things through, even though the U.S. auto industry is centered in Michigan, a key swing state, and in the surrounding states. Finally, a number of foreign car manufacturers have built factories in low-wage, low unionization states like Alabama, South Carolina, Tennessee, and Texas. They will be hit by the tariffs as well, and the resulting unemployment resulting from the flood of cheaper cars made abroad will hit Trump's supporters the hardest. (V)