Tariffs in general are not good for globalization. Tariffs take away the opportunity of benefiting from the global economy and their advantages. Tariffs are also a weapon to fight back when Governments artificially reduce prices to capture market share. Solution always lies in neutralizing the unfair practices to bring back the economies of countries hurt by unfair practices. President Donald Trump plans to place a 25% tariff on steel and a 10% tariff on aluminum imports. Both metals are crucial to the production of cars and trucks sold in America today and could raise the sale prices of those vehicles substantially. Associations representing manufacturers of vehicles and parts claim, in addition to paying more for their vehicles, American consumers and workers can also expect to bear the brunt of the retaliatory tariffs other countries will almost certainly place on goods manufactured and exported from the U.S., according to American International Automobile Dealers Association (AIADA). These proposed tariffs on steel and aluminum imports couldn’t come at a worse time. Auto sales have flattened in recent months, and manufacturers are not prepared to absorb a sharp increase in the cost to build cars and trucks in America. The burden of these tariffs, as always, will be passed on to the American consumer. The Motor & Equipment Manufacturers Association (MEMA) also expressed opposition to the plan. MEMA represents more than 1,000 companies that manufacture vehicle parts and components. The tariffs announced on March 1 will be detrimental to the motor vehicle parts supplier industry and the 871,000 U.S. jobs it directly creates. Steel and aluminum tariffs could directly counteract any benefits American manufacturers have seen from tax and regulatory reform. An analysis of tariffs on steel imposed in 2002 found that the Bush steel tariffs cost 200,000 jobs, including 30,000 in Michigan, Ohio and Pennsylvania alone. Making the underlying assumption that all of the steel and aluminum used to build a single average U.S. vehicle, sourced from one of the locations subject to new tariffs, approximate cost increase is in the range of $250 to $300 per vehicle. This value however is arrived at, solely based on the assumption of a straight pass through of the tariffs and does not account for any of the additional costs that a manufacturer or supplier may bare such as new contract negotiations and additional carrying costs.
In the Commercial Vehicle Industry, we won’t know the full impact until the final rule is issued although it is clear such actions will hurt American businesses, workers and consumers. It will hurt the U.S. economy and American companies, workers and consumers by raising prices and resulting in foreign retaliation against U.S. exporters, while we share the President’s goal of addressing global overcapacity of steel and aluminum as a support for free trade and global supply chains. If these tariffs are enacted, there’d be a significant impact to the commodities that are key components of commercial vehicles, making them more expensive for us to make, and ultimately, for our customers to purchase. Until we see the final executive order, we’re not going to speculate further on the impact of this tariff. Equipment manufacturers have begun using lighter-weight materials but still primarily offer steel-based shelving, ladder racks, and other equipment. Depending on where OEMs and aftermarket vendors source their steel and aluminum, and how much of these materials they source from foreign producers, they may be impacted by costs increases to varying degrees. Ultimately, we anticipate that how and when they choose to react to these possible input costs will likely depend on market landscape, competitive pressures, degree of the cost impact and the expected length of the impact. Vehicle manufacturers have been reducing the amount of steel in their vehicles in recent years as a strategy to lighten weight to achieve higher fuel economy, a strategy that could help reduce the impact of the tariffs. The average automobile is 54% steel and has about 1 ton of steel in it. Steel costs about $700 a ton, which is up about $100 per ton since tariff talks began, so some of the cost is already factored in. In any case, a 25% tariff, even if not offset, competed away [and] absorbed by the OEMs wouldn’t add that much to the cost of a vehicle. Vehicles that contain steel and aluminum from foreign sources could see a higher cost increase. There will be short term employment gains in the protected industries, for those manufacturers that have depended on imports for some of their supply chain raw materials there is the strong possibility they will pass through to consumers and businesses their increase cost of goods. Overall, it is very possible we will see an impact in vehicles prices.
This has led to a ripple effect on tariffs. China retaliated to threaten with counter tariffs on US products. President Trump escalated by putting a tariff of $50 billion on technology packages on US technologies used by China. This did not stop China by threatening with tariff on farm products and wine imports from the US. Next step, to protect the American farmers President Trump raised the stake with another tariff of $100 billion. It seems like this could become bigger and bigger. China showed defiance by raising the stake in the tariff war on every announcement. Fortunately, as this newsletter goes to press President Xi Jinping gave a major speech promising to increase the access of foreign companies to China’s financial and manufacturing sectors, cut imported car tariffs, and reduce ownership restrictions for foreign car companies. Xi didn’t mention President Trump in his speech, but it was clearly an effort to ease trade tensions. Markets rallied on the speech. But analysts said most of the proposals have been promised before, and the president was short on specifics and timetables. Ultimately, U.S. industry will be looking for implementation of long-stalled economic reforms, but actions to date have greatly undermined the optimism of the U.S. business community. Eventually, leaders must seek a creative solution to the US-China trade dispute. How this ends is a seriousquestion hanging over the so-called trade war now being waged by the world’s two largest economies, the United States and China. It’s easy to get lost in the tit-for-tat tariffs and other hard-knuckle penalties being used by each side to gain an advantage. The most likely outcome will be a negotiated truce. Yet beneath the current posturing, the trade dispute has also forced each side to look at its prime weak spot. For each, that is a perceived concern about an ability to invent new ideas that drive new services and products in a competitive global market. The final compromises to end this “trade war” may depend on how much each country changes its view of itself as able to invent and create new markets. For the US, the country’s global share of science and technology activities is declining. There are challenging ways for government, academia, and business to reboot the nation’s creative juices, such as increased federal spending on basic research. If each side can only recognize a common interest in fostering innovation – no matter where it happens – the “trade war” could end sooner rather than later.