In January, supply chain planning software solutions provider Kinaxis released predictions for 2020 in the automotive industry. While advancing electric vehicle development and continued mergers and acquisitions are predicted, they also predicted that tariff concerns would linger. The industry watched closely as the new NAFTA agreement, called the United States-Mexico-Canada Agreement (USMCA) was signed into law in January 2020.
However, auto tariffs are still active inside and outside the USMCA. Criteria in the agreement requires automakers to source at least 75 percent of a finished vehicle’s components from among the parts and raw materials in the three countries. The included content must be procured from sources that pay at least $16 per hour to employees.
Raw Materials Remain Source of Tariff
Two of the most critical components to build vehicles still have tariffs enforced by the US government. Steel imports from countries other than Canada and Mexico have a 25 percent tariff applied. Aluminum also has a tariff applied on all imports, although at a lower rate of 10 percent.
Over half of the materials to manufacture a vehicle are either steel or aluminum, and the tariffs continue to cut into profit margins at virtually every carmaker that sells in the US. The only relief possible for automakers would be to increase the selling price, thus passing on the increased costs to the end user.
Tariffs on Cars Imported to United States
Current tariffs are in place for automobiles imported into the US to the tune of 2.5 percent. The Trump administration has explored the potential to impose tariffs of up to 25 percent on vehicles manufactured overseas that are sold in the US.
Clearly, the final selling price of cars under these tariffs would increase by thousands of dollars. To date, these tariffs haven’t been imposed. Dozens of domestic nameplates are assembled overseas and would be subject to tariffs while nearly a quarter of international nameplate vehicles sold in America are assembled here.
Auto Parts Tariffs
Countries not part of the USMCA could be slapped with a 25 percent tariff on auto parts exported to the United States. Again, in an effort to keep more jobs at home and at a higher pay rate, imported auto parts subjected to an additional 25 percent tariff would end up being an affordability issue for the consumer, and much less of a penalty on the manufacturer.
A Plea to Cut Chinese Tariffs
Officials on both sides of the China-US tariff war have revived a plea from months ago to cut tariffs on Chinese goods. For automotive products and vehicles, as well as the greater economy, cutting the tariffs on Chinese products imported into the United States would alleviate pressure on American businesses and consumers.
Equating to a tax cut of as much as 25 percent, either temporarily or permanently lifting the tariff on as much as $370 billion worth of Chinese goods would send a positive signal to the market.
At this time, it doesn’t appear that tariffs on imported autos or auto parts, nor on raw materials are in the plan. The industry will be forced to find other ways to bolster sales in a market where the belt is tightening rapidly.
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