Attack of the Killer Audis
U.S. Trade Representative Robert Lighthizer is struggling to find a legal national-security rationale to slap 20% tariffs on automotive imports, but we’re told that President Trump has ordered him to find one anyway. There isn’t one. And if Mr. Trump goes ahead and claims there is he’ll be acting as lawlessly as Barack Obama did with his war on fossil fuels.
Mr. Trump in May directed the Commerce Department to investigate whether foreign cars and automotive parts imperil national security under Section 232 of the Trade Expansion Act of 1962. That law allows the President to restrict imports that he determines threaten national security, which is broadly defined as including “the economic welfare of individual domestic industries.” But this grant of authority is not limitless, and the U.S. auto industry is healthier than it has been in decades.
The United Auto Workers union argues that the U.S. needs to be prepared for a World War II-style mobilization when auto plants “quickly changed from producing civilian cars to Jeeps, tanks and bombers.” But even if the U.S. did have to ramp up defense production, we have far more manufacturing capacity than during World War II, including 14 more auto-assembly plants. Allies could also assist.
As for the “economic welfare” argument, not even American carmakers support Mr. Trump’s tariffs on foreign cars. Detroit’s trucks and vans are already protected by a 25% tariff. And U.S. automakers have largely stopped producing passenger cars for the U.S. market because trucks and SUVs are far more profitable.
GM opposes Mr. Trump’s proposal for a 20% tariff and explained in a public comment to Commerce last week that raising prices to cover the higher cost of imported auto parts would reduce sales. The alternative, GM writes, is to reduce investment, which would result in a smaller workforce and “could delay breakthrough technologies and threaten U.S. leadership in the next generation of automotive technology.” That harm to innovation would be a far greater threat to national security than Audi sedans.
American auto-manufacturing has never been more competitive, and the overwhelming evidence is that the tariffs would hurt the U.S. auto industry and economy. Automotive jobs have increased by about a third since Nafta was ratified and are 100,000 above the peak before the 2008-2009 recession. Much of the job growth is driven by foreign manufacturers and imports. About 40% of the content in Mexican imports was made in the U.S. Cross-border supply chains improve efficiency and create jobs in both countries.
Tariff-free trade with Mexico has also brought more investment. Daimler, BMW andVolkswagen employ 36,500 workers and produce 804,200 vehicles in the U.S. In the last year, Daimler, Volkswagen, BMW, Volvo, Toyota and Mazda have announced more than $4 billion in new U.S. investments. America exports almost as many German-branded cars (about 481,000 in 2017) as it imports from Germany (492,000).
A big risk is that the President’s tariffs will hurt exports by triggering retaliation. China says it will respond to Mr. Trump’s tariffs on industrial products by raising its duty on American cars to 40%, which will whack Americans employed at BMW and Mercedes plants that supply cars to the Chinese market.
According to the Peterson Institute for International Economics, a 25% tariff on autos and auto-parts would reduce U.S. production by 1.5% and cost 195,000 job in the industry. If other countries retaliated, 624,000 jobs would be lost. The Auto Care Association estimates the tariffs could cause 6,800 job losses at repair shops and 85,200 in wholesale and retail segments. These are mostly small family-owned businesses.
Consumers would also have to pay about $5,000 to $6,000 more for a car, which would offset some benefits from tax reform and slow vehicle sales. A modest decline in auto sales during the first quarter of this year clipped 0.34% off U.S. GDP growth.
One reason the economy struggled under Barack Obama is because he stretched the law to serve his ideology. Businesses never knew when a new regulation might hit next, and on what legal basis. Mr. Trump is making the same mistake on trade, substituting presidential whim for clear and fixed rules.
If Mr. Trump invents a national-security threat to justify car tariffs, business should fight back in court and Congress should strip his Section 232 power.
Appeared in the July 6, 2018, print edition.