Center for Automotive Research study details ‘profoundly negative’ price hikes, job losses — 90% attributable to tariffs



Naomi Powell, Financial Post
February 15, 2019

U.S. tariffs on auto imports would compound the pain of other recent trade measures, with the impact spilling across borders, even if Canada, Mexico and South Korea are exempted from the levies, says a leading analyst at the Center for Automotive Research.

“We make things together, parts cross our borders multiple times using U.S. components and U.S. parts,” said Kristin Dziczek, vice-president at the Michigan-based think tank. “If those U.S. parts and components have imported content in them, then you will be hit by increased costs as well.”

A new study by the centre found light-duty vehicle prices would climb by an average US$2,750 for American consumers if auto tariffs were added onto existing U.S. trade measures including tariffs on steel, aluminum and various Chinese goods. Imported cars would be hit hardest, with a price hike of about US$3,700, while the cost of American-made cars would rise by US$1,900.

The combined impact of the trade measures would cause U.S. car sales to fall and 366,900 American jobs to be lost, with the vast majority of the damage — about 90 per cent — caused by the auto tariffs.

“If we think the tariffs on steel and aluminum were bad, this would be way bigger,” said Dziczek. “Even if the side letters (exempting) Canada, Mexico and South Korea hold, we still find enormous economic harm from the (Section) 232 auto tariffs.”

Though the specific impact on Canada is not measured, the cost hikes in the U.S. would inevitably spill over the border to some degree, Dziczek added.

“On imported vehicles you won’t face higher costs obviously,” she said. “That’ll just be in the U.S. But to the extent American-made cars rely on imported parts, they will be more costly and that will raise their costs in Canada, too.”

The U.S. Department of Commerce is expected to deliver a report by Feb. 17 on whether imports of autos pose a threat to national security. Once the report is delivered, Trump will have 90 days to act on its recommendations, though those may be kept confidential, analysts say. Trump has floated the idea of potential tariffs of 25 per cent on imported autos and 10 per cent on parts.

Costs for Canadian consumers would also rise, analysts say.

Canada will likely see a “second-hand impact” if the tariffs are applied to both autos and parts, but Scotiabank economist Juan Manuel Herrera expects the impact to be “limited.”

“We’ll likely see an indirect effect if they are imposed on parts from other countries,” he said. “Much depends on how broad they are.”

Canada and Mexico both have “side letters” with the U.S., negotiated alongside the revamped North American Free Trade Agreement, that provide certain exemptions from any potential auto tariffs. Canada’s exemption covers 2.6 million vehicle imports and US$32.4-billion worth of autoparts, well above current export levels.

Though the new NAFTA has yet to be ratified, the letters went into force when the trilateral deal was signed late last year, said Flavio Volpe, president of the Automotive Parts Manufacturers’ Association. They include an exemption on autos and parts as well as an immediate 60-day reprieve designed to allow Canada and the U.S. to finalize legal language ensuring the exemption captures all of the elements impacted by the potential tariff, Volpe said.

“The reason that there’s a 60-day period is that none of us could predict what that report was going to say and what a consequent regulation was going say,” Volpe said. “It establishes a period where we work on the language to make sure everything gets captured within it properly.”

The Center for Automotive Research report looks at 10 scenarios for how the tariffs might be imposed, applying different combinations of policies and trade deals including the implementation of the revised NAFTA, Section 232 tariffs on steel and aluminum and Chinese imports.

It finds that U.S. dealerships are likely to experience a decline in revenue between US$6.1 billion and US$43.6 billion and job losses of between 10,700 and 77,000 employees. U.S. gross domestic product is projected to fall between US$6 billion and US$30.4 billion while total economy-wide employment is expected to decline by between 71,200 and 366,900 jobs. Higher new car prices will in turn raise the price of used vehicles as well as auto repair and maintenance — thereby boosting the overall burden of vehicle ownership for consumers.

“Across all these policy scenarios, the impact on the U.S. new vehicle market and the broader U.S. economy is substantial and nearly entirely determined by the severity of the potential Section 232 tariffs on imported autos and auto parts,” the report states.

The range of likely outcomes “are all profoundly negative for consumers, for new vehicle dealership revenue and employment, and for overall U.S. economic output and employment levels,” it adds.

Via: Financial Post