The uncertainty of new tariffs is making strategic planning difficult
INSIGHT ARTICLE |
For executives in many industries, keeping up to date with the tariff proposals coming out of Washington can be difficult at best. It can seem like every week there is a new tariff on yet another commodity or that yet another country is being exempt from inclusion. This uncertainty can make strategic supply chain planning difficult.
State of flux
Automakers and suppliers are understandably concerned that the potential impact of the new tariffs—which are better understood as taxes on imports and exports—on steel and other commodities could have an adverse effect on the industry, their companies and, ultimately, their customers. When the Trump administration first announced its plans to broadly impose tariffs on steel and aluminum, shares of American automakers declined.1
It can be difficult to see the economic logic driving the tariffs. Currently, the proposed steel and aluminum tariffs would exclude many of our allies, such as Canada, from which the United States imported about 16 percent of its steel in 2017. Compare this to China, a primary target of the tariffs, from which the United States imported only 2.2 percent of its steel in the same period.
One stated premise behind the tariffs is to stem the flood of cheap steel coming into the United States and thereby save jobs in steel and aluminum industries. Yet the tariffs themselves could negate this goal. For example, let’s assume that the tariffs result in saving 10,000 jobs. The proposed 25 percent tax on $29 billion of imported steel and 10 percent tax on $17 billion of imported aluminum will result in increased costs passed along to firms and consumers to the tune of $9.15 billion. Therefore, the implied cost of saving those jobs amounts to about $915,000 per worker.
A recent editorial noted that modern auto supply chains are essentially borderless and what constitutes a foreign-made car (or a domestic-made one, for that matter) isn’t as easy to define as it once may have been. The Chevy Bolt EV, for example, is made up of only 26 percent American/Canadian parts, while more than half of it comes from South Korea—but it’s assembled in Michigan. Some 63 percent of a German import, the Audi SQ5, is made in Mexico, with some components made in Hungary—but it’s all assembled in Mexico.2 It could be argued that the SQ5 is a German import only by virtue of its brand.
This is similar to the Obama-era tariffs in 2009–2012 in the tire industry. In that case, one study estimated that after the tariffs were imposed, the U.S. tire industry grew by about 1,200 jobs—but at a cost of about $1.1 billion, paid mainly by consumers who were charged more for American tires when competition from China disappeared.3
In 2002, the Bush administration implemented steel tariffs as well, but quickly abandoned them when the World Trade Organization, after receiving complaints from steel producers around the world, determined that the tariffs were illegal.
It is also important to keep in mind that the United States actually has a trade surplus with many countries in services (as compared to a goods deficit). The United States has $30.8 billion surplus in upscale services sector with China, for example, supporting 2.6 million high-paying jobs in the United States.
More to the point, the United States’ principal trade problem with China is intellectual property and technology theft, which recently prompted the Trump administration to announce significant annual tariffs and penalties on China.4 These tariffs could have an even greater effect on U.S. consumers than those on steel and aluminum.
What to expect
The United States, Canada and Mexico may finally be converging on some key issues regarding NAFTA, increasing the likelihood of a successful negotiation. This is good news for the U.S. states that are overly dependent on the North American Free Trade Agreement economy.
But automakers and others should expect many more tariffs in coming months in addition to those on solar panels, washing machines, steel and aluminum. Asymmetric China retaliation is anticipated as well, and likely will be designed to take market share from U.S. companies.
The individual supply chains of U.S. companies will determine the extent of their exposure to higher input prices. Automakers and their suppliers will do well to stay on top of the latest developments regarding the new tariffs, and plan accordingly.
1A. Swanson, “Trump to Impose Sweeping Steel and Aluminum Tariffs” (Mar. 1, 2018) The New York Times.
2Editorial board, “Tariffs on Imports? What Exactly Is an Import?” (Mar. 25, 2018) The New York Times.
3D. Matthews, “How Obama’s tire tariffs have hurt consumers” (Oct. 23, 2012) The Washington Post.
4M. Landler, A. Rappeport, “Trump Plans Stiff Trade Tariffs and Other Penalties on China” (Mar. 21, 2018) The New York Times.
With more than $1 trillion in trade and 14 million jobs at stake, what are the potential outcomes for leaving or remaining within NAFTA?
In the first quarter of 2018, the RSM US MMBI registered an all-time high of 136.7, helped by strong economic fundamentals.