Threatened U.S. Auto Tariffs: Time to Call the Bluff of the “Bluffer in Chief”

Donald Trump’s latest pronouncement that the U.S. is initiating a Section 232 investigation into whether the import of foreign autos undermines U.S. national security should be taken for exactly what it is: a bluff. This latest move is added to a long litany of U.S. pressure tactics and threats of protectionism, using “creative” interpretations of trade laws. Some of the threats are real, such as the recently imposed tariff on newsprint, a tax on U.S. newspapers and consumers in order to mollify a particular industrial constituency. Others are part of escalating U.S. pressure as part of the NAFTA negotiations.

It started by threatening Canada and Mexico with tariffs on U.S. imports of steel and aluminum, (a reality as of today) again ostensibly on national security grounds. This was followed by the blatant hyperbole of designating Canada as a “Priority Watch List” country on the annual list of intellectual property transgressors published by the U.S. Trade Representative’s Office. This process placed Canada in the same category as Algeria, China and Venezuela and in a worse category than countries like Egypt and Pakistan. Now the Trump Administration is waving the threat of imposing special 25% auto tariffs.

This is all about ratcheting up the pressure on Canada and Mexico to come to a deal on autos in NAFTA. The U.S. has been trying to revise the auto rules of origin (ROO) to ensure that more value-added production takes place in the U.S. The latest proposal is reported to involve ensuring that specified levels of production take place in jurisdictions paying auto workers at least $16.00 per hour. This is specifically directed at Mexico where the average hourly auto wage is around $4.00. When NAFTA was first negotiated more than 20 years ago it was expected that Mexican industrial wages would rise more quickly than they have.

The fact that Canadian, and European auto wages are essentially on a par with those in the U.S. is irrelevant to the Trump Administration. The threatened tariffs are all about putting more negotiating coinage on the U.S. side of the NAFTA negotiating table. The argument being presented justify a national security (Section 232) investigation is that the growing share of the U.S. domestic auto market occupied by imports undermines U.S. capabilities in R&D, technology and design and other head office tasks. This is hard to square with Trump’s goal of repatriating blue-collar assembly-line jobs. The reality is that outsourcing elements of production and assembly to lower-cost jurisdictions keeps production costs down and unit sales up for vehicles manufactured by U.S. auto firms, leading to the preservation if not the expansion of high value-added headquarters jobs.

In the NAFTA negotiations the U.S. side has put forward complex and largely unworkable formulas to calculate the ROO—often against the wishes of U.S. automakers who operate with global supply chains—to the point that many observers have speculated that it would be easier to simply pay the existing 2.5% car import tariff than to try to comply with the proposed new U.S. rules in order to get duty-free NAFTA treatment. Now the U.S. has upped the ante with a proposed ten-fold increase to bring car tariffs in line with trucks, at 25% on a value basis, signalling that simply swallowing the tariff should not be considered an option.

But let’s suppose that, after a lengthy investigation, the U.S. Commerce Department determines that the import of all those Mercedes, BMWs, Hyundais, Toyotas, Mazdas, Subarus, etc. from offshore–and of course the Chevys, Fords and Chryslers from Canada and Mexico–actually undermined U.S. national security, who would suffer? Along with those “latte-sipping, Porsche-driving” Democrats in California that Trump does not care about, Trump’s favourite constituency, the U.S. “working man”, the middle class families who drive U.S, Asian or European badged cars manufactured or assembled outside the U.S., would feel the brunt. The impact would be immediate and would significantly drive up auto prices in the U.S. across the full range of vehicles. It could even affect those “good ol’boys” with the rifle racks in the back windows of their pickup trucks. If you wanted to impose a new tax on the working and middle class in the U.S., this would be a very effective way to do it.

And that doesn’t even begin to count the negative impact on U.S. automakers, and therefore U.S. manufacturing  jobs, as well as jobs throughout the whole automotive retail ecosystem.

This is why it won’t happen, so let’s not panic. The “Art of the Deal” may be all about talking tough, bluffing and bullying but as any poker player knows, there comes a time to call a bluff. If there ever was such a time, this is it.

© Hugh Stephens, 2018

Hugh Stephens is an Executive Fellow at The School of Public Policy at the University of Calgary