The Threat of Tariffs May Work

Love him or hate him, you’ve got to hand it to Donald Trump. His trade and tariff strategy — risky as it is — seems to be working. The master negotiator is hammering out agreements — first with the Europeans and now with Mexico — that are better deals for American firms and workers.

The threat of tariffs is leading to lower tariffs. The irony is that if President Trump keeps winning this way, he may actually end up being one of the champions of freer trade.

But Trump is still holding firm on his call for 20 to 25 percent auto tariffs on all imported auto parts and cars. These are said by the White House to be necessary for national security reasons, though this argument that the Nissans and BMWs on the roads are a national defense concern seems more than a little flimsy. This tariff is about saving American auto jobs, and though that’s a defensible goal, will it work?

History suggests that auto trade restrictions almost never deliver. Back in the late 1970s and early ‘80s, the United States put trade restrictions on the surging Japanese auto companies — including Honda and Toyota. A landmark study by Robert Crandall of The Brookings Institution found that from 1982 to 1985, those trade barriers led to a “$10-$15 billion welfare loss absorbed by U.S. consumers.”

Crandall argues that the benefits to the domestic auto industry from those policies (about 1.3 million more cars built) were unlikely to be “worth more than a fraction of the cost.” The policies were a big net loser for the economy. Most economists come to the same conclusion regarding the Bush steel tariffs in 2002.

What is very different today from even the failed trade protectionist policies of the 1970s, '80s and 2000s is that global supply chains make it increasingly difficult to determine what country made the car. The steel in a Ford truck may have come from Canada, with the parts coming from Singapore and the electronic gadgetry coming from Germany, and some of the assembly may have been done in Mexico.

But the Trump tariffs would be imposed not just on imported cars but on the auto parts, which would make manufacturing the car in the United States clearly more expensive.

With $50 billion of annual sales abroad, America is the third-largest exporter of cars, behind Germany and Japan. This means that America might end up losing many auto jobs because of the tariffs. This is one of the reasons most of the American auto companies oppose these tariffs that are supposed to “protect” them from foreign competition.

The employment impact of the proposed 25 percent tariff could add significantly to the cost of cars made in America and result in a 2 percent drop in direct auto-sector employment, rising to 5 percent and a total job loss of over 600,000 after expected in-kind retaliation by trading partners, according to an analysis by the Peterson Institute for International Economics. This is the opposite result of what Trump intends.

That’s only the impact on manufacturers. The Center for Automotive Research found the 25 percent tariff would slash dealer employment by more than 100,000 — an average of seven employees per dealership.

One study by the Trade Partnership predicted that tariffs could (in the absence of retaliation) boost employment in the auto sector by 92,000 autoworkers. But it also found that the tariffs would shave 0.1 percent off overall gross domestic product and destroy 250,000 jobs in the rest of the economy. If you are counting, that means a net loss of 158,000 American jobs.

The tariffs would raise the cost of buying a new car by as much as $2,000, which would be a big dent out of family incomes. Many consumers would delay buying a new car, and this in turn would mean more old cars on the road.

As Trump’s own Department of Transportation found in its excellent study on the cost of Obama-era fuel efficiency standards, delaying the purchasing of new cars — which are cleaner and safer — means more pollution and more traffic deaths.

To his credit, Trump has won trade concessions from the Europeans and now the Mexicans with the threat of tariffs on cars and auto parts. This is a case where the bark of Trump’s tariffs is a more effective strategy than the bite.

But actually implementing the tariffs would be negative. History proves that the best way to boost the U.S. auto industry is not with protectionism but by creating a level playing field that forces Ford and General Motors to compete on a level playing field. The booming economy is visible proof that this Trumpian strategy is working with every other American industry, from potato chips to computer chips, from bourbon to bluejeans. Why not cars?

The Patriot Post® · The Threat of Tariffs May Work