By Josh Zumbrun
The successful rewrite of the North American Free Trade
Agreement lifts a cloud hanging over a significant portion of the
U.S. consumer economy by eliminating a Trump administration threat
of 25% tariffs on auto imports from Mexico and Canada, two of the
biggest sources of cars sold in the U.S.
During the final stages of the Nafta negotiations, which
culminated over the weekend in the new U.S. Mexico Canada
Agreement, or USMCA, President Trump repeatedly threatened to
impose the stiff auto tariffs if the countries couldn't come to an
agreement. The threats raised concerns among automobile industry
executives and economists who cautioned that widespread damage
would result if tariffs were applied to the roughly $360 billion in
autos and auto parts that the U.S. imports each year.
In agreeing to the revised treaty, Mexico and Canada secured
side agreements that would largely exempt them from the tariffs,
should they take effect on imports from other countries. Similarly,
the threat of tariffs has also spurred the European Union and Japan
to step up their trade talks with U.S. negotiators.
So long as the threats result in talks instead of tariffs,
economists say the potential hit to the U.S. economy is diminished
considerably. "If you look at the results: Did it get them to the
table? Yes. Did it increase their blood pressure? Yes," said
William Reinsch, a senior adviser at the Center for Strategic and
International Studies.
And yet, "it didn't cause anybody to surrender," Mr. Reinsch
noted. "But you can argue it got them to take the whole thing more
seriously than they would have otherwise."
When Mr. Trump first threatened tariffs on autos, it sent shock
waves through the industry. Of all his trade threats, the
automotive tariff was the single largest of his threats, a fact Mr.
Trump himself repeatedly acknowledged, saying that "cars are the
big one."
The auto industry noted the Trump administration's willingness
to back up its threats with action, at least some of the time. The
administration has imposed tariffs on the entirety of the global
steel and aluminum industry, only exempting countries if they
agreed to restrictive quotas instead. The administration has also
moved forward with tariffs on about $250 billion of Chinese
imports.
If tariffs had been applied to all of the $360 billion in annual
auto and auto part imports, it would have more than doubled the
Trump administration's application of such tariffs to date. The
Center for Automotive Research estimated the 25% tariffs on all
imports of autos and auto parts would have raised vehicle prices by
$4,400 and cost the U.S. about 715,000 jobs.
Higher auto prices would mean consumers would have less for
other purchases, denting other sectors of the economy as well. The
result: The tariffs could have shaved about $60 billion off U.S.
gross domestic product, enough to slice about 0.3 percentage points
off the U.S. growth rate, with the damage highly concentrated in
the auto industry, CAR said.
Such estimates led to unified opposition from the auto industry.
When the Commerce Department held its public hearings on the
proposal, all but one of the 43 groups that asked to testify at the
hearing spoke out against the tariffs. The only group to offer
qualified support was the United Auto Workers, the country's
largest automotive labor union, which said they supported "targeted
measures."
Even so, the UAW warned that "any rash actions could have
unforeseen consequences, including mass layoffs."
All told, the U.S. imported $178 billion of autos and auto parts
from Canada and Mexico in 2017. Under the new Nafta deal, the U.S.
agreed that even if they move forward with the auto tariffs,
Canada's and Mexico's current level of imports -- as well as an
added buffer -- would be exempt.
The tariff threats have also brought the EU and Japan to the
negotiating table. The U.S. imported $62 billion of autos and auto
parts from the EU in 2017, and $55 billion from Japan. The U.S. has
also recently inked a new trade agreement with South Korea, the
source of another $24 billion in imports.
Canada, Mexico, Japan, South Korea and the EU account for about
90% of all imports. If all win exemption, then the car tariffs,
though not trivial, would hit a smaller share of trade than the
steel and aluminum tariffs, and would be far smaller than the
actions against China.
For Japan, South Korea and the EU, the exemptions remain
tentative. The auto tariffs have been threatened under the auspices
of Section 232 of the Trade Expansion Act of 1962, which allows
tariffs in the case of a threat to national security. The Commerce
Department has been ordered to study whether auto imports are a
national security threat, and must complete a report on the topic
by February.
Asked today about the status of the study of the automotive
tariffs, Lawrence Kudlow, director of the National Economic Council
at the White House, said, "It's still under investigation, still
working on it."
That means the possibility of tariffs cannot be discounted.
For now, with Canada and Mexico spared, the U.S. economy has
avoided the most extreme scenario.The CAR study estimated that,
with Canada and Mexico exempt, but 25% tariffs still hitting
imports form the rest of the world, the average vehicle price would
rise by $1,760 and the U.S. would lose 197,000 jobs.
The new Nafta agreement, while offering Canada and Mexico an
exemption from the tariffs, still explicitly leaves open the
possibility of tariffs on everybody else.
"This administration has proven that it has used tariffs as a
negotiation tool," said Jason Gerlis, sub-regional director for
North America and the Caribbean at TMF Group, a global professional
services firm that specializes in business expansions.
"They've definitely left the option open," Mr. Gerlis said,
"either because they intend to apply them or because they want to
continue having that hammer raised over everyone's head."
--Anthony Harrup contributed to this article.
(END) Dow Jones Newswires
October 02, 2018 18:18 ET (22:18 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.