It’s Raining Tariffs, Open the Umbrellas PDF Print Email
Tuesday, August 14, 2018 12:00 PM

It’s Raining Tariffs, Open the Umbrellas

By Wayne Juchno, NARSA Executive Director 

Well what do you do when the U.S. government plays rain maker and makes it rain tariffs? Then other countries retaliate with their own tariffs. Throw in an additional threat to impose quotas and you have a very, unsettled and stormy outlook for the auto and truck parts and maintenance markets.
Take heart, the parts and maintenance market is global, linked to new vehicle production and sales, and employs millions of people. These facts alone will make most politicians listen to the concerns of a vital, vibrant and innovative industry that is being directly impacted by protectionist moves.

Not all people think tariffs are the best way to manage trade imbalances and history is full of examples of failed attempts to bolster domestic industries by imposing government created barriers or protections. In most cases, these moves tend to backfire and result in damages to domestic employment and for the home team manufacturers. Tariffs are taxes and they increase the cost of doing business. Are they worth the gamble? We will find out.
What can be done in the meantime? Many companies are reaching out to customers with well-thought out messages. They are telling their customers that they are in uncharted waters and looking to see how these recurring global governmental roundhouses are going to affect them.

They are telling their customers that they will continue to work to provide the highest levels of service, quality and availability that they can achieve despite the added challenges. However, many questions remain. Will there be products available? Will materials be in supply? Will these moves drive innovation? Will countries and trade partners further build on cooperation or descend into rounds of increasing trade hostility?

Phillip Cochran of C, G & J and Brice Thomas Radiator and A/C is a quintessential NARSA member. He is a principal in a family owned and operates small to medium sized business that incorporates product manufacturing, distribution as well as retail and B2B service. They make and sell heat exchangers in Alabama using aluminum, copper, brass and to some degree steel. We asked Phillip to share his thoughts about how the Section 232 tariffs on aluminum and steel is affecting his family’s businesses.

“I was told that thin aluminum (which includes fin and aluminum sheet) would have a 10% tariff imposed and 25% would on steel. Well, that sent shock waves through the industry,” commented Cochran

“Undoubtedly, people began to look for places to order that material in the States which in turn raised the cost of materials for those that were buying material produced in the U.S. Not only did we see our price go up, it created huge backlogs,” he said.

“My suppliers found that people were doubling their material orders because they were afraid of running out of material and the price increases. This too caused an issue for the mills. We have seen our aluminum plate material increase over 30% from January to June. Imports are coded with an HTS code, these codes are critical in determining the type of product being imported and what, if any, tariffs might apply.

“We received a small container of plastic/ aluminum radiators form China the other day and was charged 25% tariff on these radiators. Believe it or not, I was pleased with that. Because from the beginning, I have believed that it is the completed products flooding our markets not the raw materials that are the issue,” said Cochran.

“All the above information just put a further burden on manufacturers in the USA!! We not only had to compete against cheap products, but now our prices have increased on our raw materials and not to mention the issue with supply. So I am hoping that all the tariffs will allow US manufactures to have an even playing field when competing against China. This is all we can ask,” he concluded.

Remember a tariff is a tax. Somebody needs to pay it. Tariffs are collected on imports, not the people who making the products. In this case it is on steel and on aluminum – some materials and products. In this case, it is collected by the USA government and if USA businesses want or need these products, they pay the tariff. There are some exceptions and there may be more but the process to get exemptions is complicated and time consuming. The process also restricts who can apply for an exemption. In the case of steel and aluminum, it is those firms that are using them. Trade associations are not permitted to file for exemptions. Exemptions are also limited to typically a year and requests must be made on individual products not families of products.

One thing that has become a certainty – the cost to produce aluminum and steel products and metals is in uncharted territory. For heat exchange transportation applications, aluminum is by far the dominant metal. Some say a ten percent tariff may be manageable because it applies across the board however for others it may be a game changer.

Overall the automotive aftermarket is not pleased with the tariffs and are even more negative to any suggestion of import quotas. The global industry of the manufacture and distribution of automotive and heavy truck parts is complicated and interdependent.

Joining in the public outcry over new trade policies is just one step MEMA (Motor and Equipment Manufacturing Association) has taken to educate the Trump administration and Congressional leaders about the unintended consequences of tariffs on U.S. auto parts manufacturers, who are facing trade challenges and uncertainties on several fronts now - including North American Free Trade Agreement (NAFTA) renegotiations, Section 232 investigations into automobiles and automotive parts, Section 301 tariffs on Chinese imports, and the Section 232 tariffs on steel and aluminum.
MEMA says its members could face having to pay double tariffs on some materials necessary to manufacture parts in the U.S. Industries like motor vehicle parts manufacturing, which require long-term investments in facilities and employees, depend on regulatory and market stability. There is little doubt that the uncertainty and added costs the administration is creating will put U.S. investments and jobs at risk. MEMA member organizations directly employ close to 900,000 people in the United States.

Parts manufacturers and distributors will be closely monitoring the effects of these tariffs on their operations and may need to make changes across their budgets including the number of people them employ.

Another giant in the advocacy for the automotive parts market, the Auto Care Association (ACA) is also very active promoting the interests of the automotive parts and service market. In July, ACA President and CEO Bill Hanvey testified before the Department of Commerce (Commerce) in Washington, D.C. on the Section 232 National Security Investigation of Imports of Automobiles and Automotive Parts. In Hanvey’s testimony, the Auto Care Association urged the Trump administration to consider the severity of unintended consequences that may ensue by imposing of tariffs on imported autos and auto parts, including the negative impact it may have on the U.S. economy and jobs, our global competitiveness, and U.S. consumers and families.

“The auto industry has an international footprint and comprises integrated supply chains that are long and global,” said Hanvey. Hanvey also noted that imports, including raw materials and intermediate goods, allow our industry to remain competitive domestically and to export globally, while supporting a broad range of U.S. jobs.

“A recent economic study completed for the Auto Care Association found that a 25 percent tariff on imported auto parts could cause a reduction of 17,800 jobs in the auto parts manufacturing sector, resulting in $1.4 billion in lost wages,” said Hanvey. “The study further predicts that 6,800 jobs would be lost by vehicle repair shops and an additional 85,200 jobs would be lost in the auto care wholesale and retail segment due to unperformed maintenance.

“We support the Trump administration’s efforts to improve U.S. competitiveness in the global marketplace, but strongly recommend that the administration refrain from trade restrictions that would undermine the auto industry,” said Hanvey. “We urge the administration to seek solutions that protect U.S. investments, facilitate trade and create competitive value chains that benefit the global growth of our industry.”

The other giant in the auto parts industry, The Specialty Equipment Market Association (SEMA) cautioned President Donald Trump and the U.S. Congress that tariffs imposed by the U.S. government are harming American companies, workers, and consumers. SEMA member companies are now grappling with higher-priced steel and aluminum because of global tariffs. The U.S. government has also initiated questionable tariffs on Chinese products, and retaliatory tariffs levied by China and many American allies are in the works.

Beyond that, the U.S. government is now threatening additional tariffs of up to 25% on imported automobiles and auto parts. "The United States has helped create a global free trade system that includes mechanisms for addressing unfair trade practices," said SEMA President and CEO Christopher J. Kersting. "SEMA cautions the president and lawmakers to work with our trading partners and employ U.S. law judiciously. The current tariffs are a tax on American companies and consumers that are causing unnecessary harm."

SEMA member companies employ over one million Americans who produce, sell, and install specialty auto parts on every type of automobile built in the U.S. and overseas. Products range from custom wheels to turbochargers, lighting equipment, exhaust systems, suspensions, truck caps, mobile electronics, and other parts that enhance a vehicle’s appearance and performance. The supply chain for these parts is global, integrated, and complex. Beyond domestic sales, SEMA member companies have a robust export market.

SEMA members have seen steep price hikes for steel and aluminum and are now having to make tough decisions about passing those costs along to the consumer. Marketplace confusion with respect to country exemptions and company exclusions remains unresolved. A new set of tariffs is now being imposed on Chinese products, but it is unclear how they will address intellectual property threats and free market access.

"SEMA welcomes efforts by the U.S. government to protect American companies and their customers from unfair trading practices," said Kersting. "We urge the president and Congress to pursue trade infringements in a fashion that does not inflict unintended economic harm."

A tax of this nature affects businesses in a number of ways. At the onset, it can cause market disruptions and shortages when market uncertainty produces a rush to stockpile. History tells us that tax increases are eventually paid for by consumers or users of the products and materials. When it is on metals such as aluminum and steel, it can affect a range of products from building supports to washing machines to radiators to automobiles. The Steel Market Development Institute tells us in 2018 approximately 258 pounds of steel were used in each vehicle. Some consumers may delay or cancel plans to purchase products such as new cars.

If the Trump Administration continues to implement tariffs or quotas on U.S. imports of automobiles and automotive parts, the Center for Automotive Research (CAR) study says:

  • Consumers may see the price of all new vehicles rise depending on the level of tariff or quota, where the vehicle was assembled, and whether the policy provides exemptions for automotive trade with Canada and Mexico.
  • Higher new car prices will drive some consumers into the used vehicle market where prices will also be higher due to heightened demand and constricted supply – producers cannot make more used vehicles.
  • Higher automotive parts prices are also likely to drive up the price of vehicle maintenance and repair, so even holding on to an existing vehicle will become more expensive. 
  • The CAR report says U.S. automotive and automotive parts manufacturers would not benefit from tariff or quota protection since all vehicles produced in the United States rely on imported content and a substantial share of U.S.‐ produced automotive parts and components are exported for assembly in vehicles built in other countries. Over 70 percent of 2017 U.S. auto parts exports were to Canada and Mexico (U.S. International Trade Administration, 2017), so including these two trading partners in the trade action would be particularly harmful to U.S. automotive parts producers. 

To gauge the potential impact tariffs would have on the new car market and how they would affect consumers’ buying habits, surveyed 1,453 current car shoppers on its site. The survey found that 41 percent of car shoppers say that tariffs on new vehicles would likely cause them to buy a used vehicle instead. The study also found the following:

  • Many consumers are bracing for tariffs to push vehicle prices higher; 65 percent said they expected this to happen. 
  • Shoppers incorrectly believe U.S. brands won’t be hit by tariffs as badly as foreign brands: 45 percent falsely believe this to be the case. 
  • If tariffs do push vehicle prices higher, 53 percent of consumers expect automakers to pass those higher costs on to the consumer rather than absorbing them to keep prices stable.

Historically, tariffs and other protectionist moves by the U.S. government does not have a good track record in creating jobs and in increasing business.
According to CATO Institute; Policy Analysis: Doomed to Repeat by Scott Lincicome (August 22, 2017): “. . . many studies of U.S. trade policy
during the mid-20th century found that specific import barriers imposed massive costs on consumers and the economy more broadly, especially when compared to the jobs supposedly saved or created in the protected sectors at issue.

The report says, “For example, the 1983 study by AEI’s Murray Weidenbaum and Michael Munger estimated that U.S. protectionism in five broad sectors—textile and apparel, machinery and transport equipment, metals and minerals, other manufactured products, and agriculture—imposed at least $58.5 billion ($173.2 billion in 2017 dollars) in direct costs on U.S. consumers in 1980. That amounts to “an implicit per-capita tax of $255 that year—
or $1,020 for the average family of four—to protect a variety of domestic industries.”

The effects of these policies will play out at the street, shelf, production and the production floors of the automotive business globally. In the meantime, businesses in the heat exchange industry will need to increase diligence to monitor and control costs, work hard to keep needed inventories, innovate, and to look for new or additional sources while maintain open communication with customers and business partners.