CRU: US President Takes Next Battle in Trade War to Auto Sector

LONDON, May 22, 2019 /PRNewswire/ -- Trade wars pose a serious threat to the global economic outlook. We expect large car tariffs to hurt US consumers, reduce imports, and disrupt global car production and suppliers to the auto industry.

The countries most exposed to these tariffs include Mexico and Canada followed by Germany, Japan and South Korea. The US–China trade war intensified in May, with an announcement on US tariffs on imported cars, including light vehicles, and car parts on 17 May confirming our expectation that the President will impose higher tariffs on imports of cars and car parts. Under Section 232 the Trump administration will hike tariffs from the current 2.5% by up to 25% at some point over the next six months.

In the first quarter of 2018, the US imposed tariffs on all imports of aluminium and steel. In the summer, a trade war between the US and China broke out and has since escalated. It is now confirmed that the US will impose higher tariffs on cars and car parts; details will unfold over the next six months. This Insight presents a framework we use to assess how car tariffs are likely to propagate through the US car industry.

The Section 232 auto investigation report concluded that automotive research and development is critical to US national security. It confirmed that foreign-owned car producers have a competitive edge over American-owned producers. The report concluded that to improve domestic competitiveness, imports of US cars and car parts must be reduced. The President has directed the US Trade Representative to negotiate agreements with trade partners, singling out the European Union, Japan suggesting that exemptions that exceptions may be available for Canada, Mexico and North Korea.

Trade wars risk hurting the global economy

• Autos are 3.5% of US GDP; 2% of employment; 15% of total imports
• Economy's exposure to tariffs: the US imports $300bn of cars and car parts each year
• Three of the four largest economies (US, Japan, Germany) are at risk and may retaliate
• Tariffs on car parts, such as wheels and engines, will affect countries that export car parts to the US, as well as countries that supply car parts to those exporting countries

The US relies heavily on imports to meet car demand

There has been a sizeable long-standing gap between the number of cars sold in the US and the number of domestically produced cars. This gap is filled by imported foreign cars and is a reflection of the fact that US car manufacturers cannot make cars profitably enough in the US to meet local consumer demand, which is why some US carmakers have moved production to Mexico. Apart from this, some US consumers simply prefer foreign car brands. In 2018, car sales stood at 17.2 million units, relative to domestic production of 11.8 million units. Given that some US produced cars are exported, we estimate that the US imported 6.4 million units of cars in 2018.

Read the full story: https://www.crugroup.com/knowledge-and-insights/insights/2019/trump-takes-next-battle-in-trade-war-to-auto-sector/

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