It’s Tuesday: it must be steel and aluminum tariffs. What will tomorrow bring?
It is halfway through the second month of the year and already it feels like early December… It’s been one hell of a year!
No doubt there may be other columns in this issue addressing the second coming of Donald J. Trump, and for good reason — he has turned the world on its collective ear in less than one month of being formally installed as the 47th President of the United States.
I purposely did almost nothing over the Christmas holiday break because I had some inkling of what I was going to be coming back to after the holidays.
What has been transpiring, however, has been so much worse – or has it? Let’s reflect for a minute. The one thing I learned from Trump 1.0 is that he usually does what he says he is going to do.
So, should it come as any surprise that he is imposing tariffs on some of his closest allies whose economies — especially in the automotive sector — are inextricably linked? He said he was going to do that.
Only first it was going to be a 10 per cent tariff across the board for all imports into the United States, but in November he mused about putting 25 per cent tariffs in place on day one of his presidency and also mused “jokingly” with the Prime Minister at Mar-a-Lago about Canada becoming the 51st state. Well, guess what? He is delivering on what he said he was going to do.
As I write this the President has indicated that he will be applying 25 per cent tariffs against steel and aluminum against the trading partners of the United States.
And why is he picking on Canada and Mexico? Sure it is the fentanyl and the illegal migrants, but in both cases more migrants and fentanyl come across the border from the U.S. into Canada than the other way around, but both of these were crises he promised to address when he became President. He is just doing what he said he was going to do, however, ham-fisted that may be.
I happened to be at the Canadian Embassy on inauguration day and I picked up a fair amount during my conversations with folks over a day or two. One thing that was made clear to me from those conversations is that even his closest advisors do not know what he is ultimately going to do and decide, and when. They just know that he is going to do what he promised.
While 25 per cent tariffs across the board may be coming, after all of the studies by the Department of Commerce and the United States Trade Representative have been completed related to trade deficits, illegal subsidies etc. those tariffs will likely require Congress to be involved.
The President had threatened the immediate 25 per cent tariffs on Canada and Mexico at the beginning of February under the auspices of the International Emergency Economic Powers Act which effectively allows the President to unilaterally impose such tariffs if it is an economic security issue.
As I write this the President has indicated that he will be applying 25 per cent tariffs against steel and aluminum against the trading partners of the United States.
In both cases Canada happens to be the largest exporter of both commodities to the United States — just edging out the EU on steel but far ahead of any other exporter with respect to aluminum.
As you can imagine these tariffs would ultimately have a huge impact to the tune of several thousands of dollars on vehicles produced in the U.S. if the tariff is entirely passed through.
But think about it, that doesn’t just mean higher prices for vehicles built with steel and aluminum that are impacted but, presumably all vehicle prices would go up — at least by a bit as other unaffected automakers seek more margin in the face of competitors whose costs — and therefore prices — have gone up. That’s just basic economics.
At the time the auto industry in all three countries warned the United States that if the content requirements were too stringent, that companies could simply by-pass the agreement altogether and pay the 2.5 per cent to send vehicles into the American market.
So although we came off a great sales year in Canada and the United States last year, there is no guarantee that sales are going to continue on their merry way higher with all of the uncertainty and unpredictability that tariffs bring. People that are worried about their jobs tend to put off purchasing that new vehicle which is the second biggest purchase many make in their entire lives next to their home — if they can afford one of those!
It is not beyond the realm of possibility that Trump may seek to impose tariffs on Canadian and Mexican vehicles — as he has threatened to do as well, although I am at a loss as to what authority he would use to do so.
We should almost expect that, as the President has suggested that he doesn’t need any of the cars built in Canada and that he’d like to repatriate those to Detroit. Okay, but that is not a short-term proposition even if he is serious. It would take years to migrate any Canadian production to the U.S.
A TD economist has suggested that 5-6 new plants would have to be built to replace the Canadian production, new supply chains would have to be sorted out and labour would have to be hired and trained to work in these facilities which would be a challenging task given that the U.S. is at relatively full levels of employment right now.
So the President would not even likely be in office if this were to occur so he would not even be able to bask in the glory of making this happen — assuming that is a good thing — which it is not.
One thing is reasonably clear though, the automotive industry was at the heart of the NAFTA renegotiation that resulted in the USMCA/CUSMA and it will be at the heart of the six year “review” (required under the agreement at the insistence of the United States at the time) which is likely to become a full-blown renegotiation of the agreement.
As many will appreciate under the USMCA, the regional value content requirements to secure duty free movement in the region went up to 75 per cent (at a general level) from 62.5 per cent under NAFTA to repatriate manufacturing back to North America and ideally the United States.
At the time the auto industry in all three countries warned the United States that if the content requirements were too stringent, that companies could simply by-pass the agreement altogether and pay the 2.5 per cent to send vehicles into the American market.
I think it is this issue that has the President particularly peeved and is the pretext for Chinese parts and content being built into vehicles built in Mexico and shipped into the U.S. — not under USMCA but by virtue of paying the duty presumably given that the cost of doing so is lower than the cost of paying to comply for duty free treatment under the agreement. Indeed the evidence shows that this is what is happening.
When I presented in front of the International Trade Commission in Washington on the USMCA last year, one of the other panellists made reference to the fact that the percentage of Mexican built vehicles going into the U.S. outside of the trade agreement had risen from 4 per cent to 16 per cent.
So, one can start to appreciate the concern. The solution, however, is not to bring a sledge hammer of tariffs that will end up wreaking havoc on your own economy as much as those you are tariffing, but rather be a little more considered about what you are trying to achieve.
If the idea is to keep Chinese content out of vehicles built in Mexico, perhaps the solution is to look at a higher MFN tariff than 2.5 per cent on vehicles. I don’t know if it is the solution but it is a solution to that particular problem.
The members I represent do not approve of tariffs in any way shape or form as they distort trade, impede economic efficiency, increase inflation and generally harm both workers and consumers.
That said, if we are stuck in a new reality in which tariffs are going to be a prominent fixture moving forward we had better figure out how to manage our way — creatively while mitigating the impact on our own economy. It isn’t going to be easy but it may be what we are stuck with.
