Automakers respond to tariff uncertainties with higher prices
INSIGHT ARTICLE |
There has been a great deal of disagreement in the news lately regarding the imposition of tariffs.
As of March 2018, the United States began collecting tariffs on 25 percent of the steel and 10 percent of the aluminum imported into the country. The Trump administration believes these tariffs do not add significantly to the price of a vehicle manufactured and sold in the United States.
Toyota North America, however, is one automaker that begs to differ. Toyota stated that nearly all of its vehicles are sourced with some imported parts.1 The automaker’s popular Camry model, it points out, is assembled in Kentucky but contains approximately 30 percent non-U.S.-made parts. Toyota believes the Camry would incur a cost increase of about $1,800 due to the tariffs, which they would pass on to customers. On the flipside, retaliatory tariffs on U.S.-exported goods may have a significant impact on the exporting strategies of U.S. automakers.
Consequences of trade disputes
The tariff rhetoric has been escalating for months, with the most volatile reactions between the United States and China. President Trump and others believe China has been manipulating global markets through unfair trade practices for some time. The impact of the Trump administration’s steel and aluminum tariffs on China will remain low, however, since only 1.5 percent of all steel exports and 15.5 percent of all aluminum exports from China were bound for the United States in 2017.2 However, China does represent the largest automotive market in the world,3 and a retaliatory tariff on U.S. auto exports into China will certainly be felt by U.S. automakers. Whatever tax benefits gained by automakers under the 2017 Tax Cuts and Jobs Act could be eliminated by the tariffs.
The tariff tension between the United States and Europe has eased after the July 25 meeting between President Trump and Jean-Claude Juncker, the president of the European Commission, where they agreed to hold off on further tariffs while they talk through their differences. If imposed, a tariff increase of up to 25 percent (up from 2.5 percent), as threatened by Trump, would hit Volkswagen’s premium brands Audi and Porsche, as well as the BMW, Mercedes and Mini brands, which together accounted for 1.3 million vehicles sold in the United States in 2017, of which 49 percent were imported from the European Union. A tariff hike would likely wipe out their U.S. profits.4
Tariff tit-for-tat between countries adds a layer of complexity to supply chain planning and cost management. Automakers will need to negotiate pricing with suppliers and rethink where a vehicle is manufactured to contain those costs, if those conversations are not happening already. Consider German automakers, such as BMW and Volkswagen, who manufacture in the United States but export over 50 percent of those vehicles.5 Those vehicles could be manufactured elsewhere, but at the cost of U.S. jobs.
However, it could take years to shift production out of the United States. As a result of the uncertainties surrounding tariffs, some automakers have announced price increases. This is just one of the many strategies automakers will deploy to keep the potential impact of tariffs at bay.
1A. Athanasiou, “Automakers, Canada Strike Back at Trump’s Tariffs” (July 9, 2018) Tax Notes International.
2“US Tariffs On Steel And Aluminium: Winners And Losers So Far” (July 31, 2019) Fitch Solutions.
3“Largest automobile markets worldwide between January and December 2017, based on new car registrations (in 1,000s)” Statista.
4M. Dean, G. Davis, “Global Tariffs, Forex Exposure” (July 25, 2018) Bloomberg Intelligence.
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