No one wins

No one wins with vehicle tariffs!

Tariff talk is once again dominating the headlines, this time possibly with more bite than just bark. Aside from the broad-brush, large-dollar amounts specifically levied at China, which hit several industries, the auto industry is front and centre. Impact comes from the steel and aluminium tariffs now in place, and the threat of a 25% tariff on vehicles imported into the US (which, yes, includes those vehicles built in Canada and Mexico).

Our baseline assumption is that automotive tariff threats are being used as a negotiating tactic and even if applied would be a short-term disruption. However, risk is mounting that this ploy could backfire and further escalate into something more permanent, or an outright trade war.

“automotive tariff threats are being used as a negotiating tactic”

So, what would a 25% tariff on all vehicles imported into the US do to the economy and US auto industry?

In our view, the entire auto industry loses if auto tariffs are imposed, but so do the economy and consumers. Tariffs would cost American jobs, lower economic growth and most certainly reduce vehicle sales in the US.

A total of 8.2 million units would be subject to the tariff, with only 50,000 units (from three models) coming from China. In the event that the tariff on Chinese-built vehicles is even higher, the impact would be minimal. As illustrated by the graph below, the tariff-impacted vehicles represent nearly 50% of all vehicles sold in the US, affecting every brand in the country, with the exception of Tesla. The latter, however, could be hit hard if China retaliates, or further raises tariffs in a trade war. VW Group’s heavy concentration of production in Europe and Mexico puts it at the top of the risk list, along with the other German Premium brands and the Renault-Nissan-Mitsubishi Alliance (RNM). Even the Detroit Three would not escape unscathed, with significant volumes at risk for each of them. Ford would be the least impacted, at 21% of sales from imports.

In a tariff environment, consumers would face a difficult decision as they shop for a new vehicle. We would expect some buyers to delay their purchase decision, while many could turn to the robust used-vehicle market as an alternative. Another approach would be to circumvent the tariffs by purchasing a domestically built vehicle. That does not mean, however, that US-built vehicles would avoid price hikes entirely as we would expect some level of increase for non-tariffed vehicles. Not only that, but bodystyle, brand and local capacity constraints may hinder any meaningful shift to the domestically built vehicle market. That said, Pickup Trucks are reasonably well protected as nearly 80% are sourced from the US. SUVs, on the other hand, could be at risk, given that only 46% of the models sold in the US are built locally.

“SUVs, on the other hand, could be at risk”

If the tariffs survive beyond the short term, then excess capacity in the US would amount to approximately 2 million units. Some of this excess could be adjusted for additional Pickup and SUV volumes, but most of the open capacity would be found in the wrong segments (i.e. Midsize of Large Cars that do not share platforms with SUVs). Realistically, without significant investment and retooling, only a small amount of volume could be added.

Factoring in all the variables, we would expect a sizeable pullback in US vehicle sales. Auto part and assembly plants have been setup under NAFTA and the premise that any vehicle built in North America is considered domestic. The threat of tariffs could have significant implications to planning and add unwanted costs to the industry, including the supply chain.

Estimated Impact Summary:
  • Our partner Oxford Economics estimates that 400,000 jobs would be lost over a three-year period, purely from implementing tariffs on imported vehicles.
  • US GDP growth would be cut by 0.5% annually, making fiscal policy more challenging.
  • Our volume forecasts for US vehicle sales would decline by up to 11% annually, equivalent to 2 million units, if 100% of the increase from the tariff is added to the price of a vehicle.
  • If 50% of the price increase is passed on to consumers, the volume at risk would be 917,000, equivalent to a decline of 5.4% from our base forecast of 17.1 million units.

Prolonged use of tariffs would put additional downward pressure and risk on the economy and vehicle sales over the next two years, increasing the chances of a recession and potentially converting a soft landing for auto sales into something more severe. In short, there are no winners if the threat of tariffs becomes a reality.

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Jeff Schuster, President, Americas Operation & Global Vehicle Forecasting
22 June 2018