Are auto imports a national security threat?
Dealers worry tariff threat to pressure elevated inventories
INSIGHT ARTICLE |
As the current administration continues to push its agenda to rewrite American trade policy, the next chapter, likely to be delivered later this week, may have the most far-reaching impact yet on the U.S. economy. By Feb. 17, U.S. Commerce Secretary Wilbur Ross is set to conclude an investigation examining the national security risk of automotive imports. The report will be submitted to President Trump and offer recommended actions.
The president will then have 90 days to decide next steps, or he could potentially delay his decision, giving trading partners more time to negotiate with the United States, a move that seems unlikely, given that he has already threatened to impose tariffs of as much as 25 percent on automobiles and parts.
The imposition of tariffs is focused on fixing what the president says is an unfair trading relationship with the European Union. Last year the president used the same trade law—section 232 of the Trade Expansion Act of 1962—which allows adjustment to imports without a vote by Congress, should the Commerce Department find evidence of a national security threat from foreign shipments to justify tariffs on steel and aluminum imports.
Impact on automakers
Auto manufacturers for months have been telling the administration and U.S. lawmakers about the potentially devastating consequences of tariffs and the inevitable retaliation that would ensue. U.S. vehicle sales—which slipped sharply in January—already are in slow decline. The Center for Automotive Research found that a 25 percent tariff would result in:
- 2 million fewer new vehicles sold per year
- U.S. employment losses of nearly 714,700 jobs
- GDP losses of $59.2 billion
Automakers can produce cars for about a month before the costs associated with the 25 percent tariff take effect, but by April, consumers may begin to see the impact in the form of higher prices, amounting to around $4,400 on the typical vehicle sold in the United States, according to the National Automobile Dealers Association.
Impact on auto dealers
A Center for Automotive Research study found a 25 percent tariff would result in:
- A loss of 117,500 of 1.1 million U.S. new-car dealership jobs, with the average franchised dealership losing seven jobs
- An increase in used car prices due to heightened demand and constricted supply
- Increases in the cost of vehicle maintenance and repair due to higher automotive parts prices, “so even holding on to an existing vehicle will become more expensive”
These factors, along with slowing new-vehicle sales, may precipitate a shakeout of the more than 17,000 auto dealers in the United States, as margin compression that began to surface in 2011 worsens. RSM US estimates that 65 days of dealer auto supply is the manageable threshold above which inventories start to become elevated, pressuring dealers.
Auto inventories already elevated
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The economic team at RSM US has been closely surveying the tariffs landscape, which has spread to other U.S. trading partners.