President Donald Trump’s decision this week to implement a “permanent” 25 percent tariff on imported automobiles and automotive parts represents one of his most brazen—and foolish—moves yet. For the moment, we’ll leave aside that the president relied on data at least eight years old to ridiculously argue that imported cars threatened national security, that his latest move blows up his own USMCA trade agreement, and that his tariffs can’t both raise substantial revenues (which requires more imports) and boost domestic jobs and investment (which requires fewer imports) as he claims.
…..
Today’s industry is characterized by sophisticated and highly interconnected regional supply chains spanning multiple national borders. In the North American supply chain, the manufacturing of a component like a transmission or engine may require it to travel between the United States, Canada, and Mexico multiple times before finally being incorporated into a finished vehicle.
When tariffs are applied in such an integrated market, costs do not simply rise incrementally—they compound. A single component could therefore be subjected to multiple rounds of tariffs, resulting in exponential increases in the overall cost of manufacturing. In a previous Cato blog post, for example, we showed how a simple car seat capacitor crossed borders five times. According to Canadian manufacturer Linamar, which produces transmissions via factories in the US, Mexico, and Canada, parts cross the three borders seven times, with the transmission finally assembled in Michigan.
Even if cars and parts don’t cross borders multiple times, the tariff costs for American vehicle manufacturers will be significant because they source significant quantities from abroad. Like a “Made in China” iPhone that contains parts from all over the world, an automobile that’s “Made in America” is assembled with parts from the United States, Canada, Mexico, and elsewhere. Here, for example, is the rear suspension of a vehicle manufactured in North America.
…..
This does not mean, as TV personality Jim Cramer recently alleged, that US automotive production involves merely the rudimentary assembly of foreign-made engines, transmissions, and other parts. For starters, assembly itself is economically valuable. The BMW plant in Spartanburg, SC, for example, employs more than 11,000 Americans (with junior production roles today starting at $22/hour with benefits), annually produces more than 400,000 vehicles, and was the United States’ top automotive exporter by value ($10 billion) last year.
Domestic automotive manufacturing also entails far more than assembly. In fact NHTSA data show that the engines/motors in 80 of 143 US-assembled models are made entirely (64) or partly (16) in America, while 82 of those same models have transmissions made here (75 in full; 7 in part).
Collectively, these data reveal the interdependent and complementary nature of US and global automotive production and trade: vehicles and parts are made here; vehicles and parts are made abroad; and both producers and consumers are better off for it.
…..
As Lincicome detailed in December, these and other data show why industry insiders and analysts uniformly agree that open markets—not costly Reagan-era protectionism—have fueled the growth and stability of North American automotive production since the 1990s and helped American companies and workers better compete against automotive supply chains in Europe and Asia. By permanently reducing trade barriers, trade agreements like NAFTA have been credited with attracting more foreign investment and boosting overall industry competitiveness by lowering production costs (e.g., via imported inputs), utilizing national comparative advantages, and opening overseas markets. In fact, US automotive manufacturing output and employment were stronger in the 1990s and early 2000s than in the quota-ridden 1980s and stronger than US manufacturing overall during that latter period.
…..
Tariffs will also limit consumer choices. History shows that manufacturers facing new tariffs often reduce available options or eliminate certain models altogether due to higher costs and potential retaliatory tariffs from trading partners. This helps to explain why, thanks to a longstanding 25 percent US tariff on imported pickup trucks, many smaller truck models aren’t available here. And just today, Reuters reported that industry analysts expect automakers to “spread [tariffs’] cost between US-produced and imported models, cut back on features, and in some cases, stop selling affordable models aimed at first-time car buyers, as many of those are imported and less attractive if they carry a higher price tag.”
As is so often the case with tariffs, the biggest losers will be lower- and middle-income Americans.
So far, no one in Geneva is saying much about this latest insult by the Trump administration to trade multilateralism (following Trump’s previous insults and those of Joe Biden for nearly a decade). The 165 other member countries of the WTO are doing their best to pretend the United States is not acting as badly as it is in international trade governance, as they have been doing for some time now. But it is getting harder for them to pretend that all is still well with the rules-based multilateral trading system that the United States played a major role in creating but seems now to be bent on wholly abandoning.
…..
Of course, the Trump administration looks askance at these international trade rules, much as it does at almost everything relating to international institutions of all kinds. Beginning under Barack Obama, intensifying under Trump, continuing with Biden, and now worsening significantly under Trump now that he has returned to the presidency, the United States has betrayed its history and its ideals by becoming a scofflaw in international trade. It has weakened the international rule of law in trade by undermining the WTO dispute settlement system. It has ignored a series of WTO rulings that have rightly gone against it. And it has shown little or no interest in modernizing the trading system to make it more fit for purpose in the 21st century.
…..
Sen. Josh Hawley (R‑MO) has already announced that he will be submitting a resolution soon calling for US withdrawal from the WTO. The Trump administration has not yet taken a position on this proposed resolution. If Trump endorses this effort, and if this withdrawal happens, then it would be by far the worst mistake yet by Trump—among many, many—on international trade.
Meanwhile, the other members of the WTO are reportedly working on a “Plan B” if, following the conclusion of its current contributions review, the United States ultimately decides not to pay its dues. As part of this emerging plan, expect China to step up and offer to pay more while perhaps also assuming the chairmanship of the WTO budget committee. It is unclear how this would be in the national interest of the United States of America, in trade or otherwise.
Arnold Kling writes insightfully about the realities of “the roundabout society.”
Jeffrey Miron and Jacob Winter offer evidence that “immigration benefits the destination country.”
