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U.S. Business Could Trump’s next trade move be a tariff on imported cars?

New cars sit on a lot at the Auto Warehousing Company near the Port of Richmond on May 24, 2018 in Richmond, Calif.

Justin Sullivan/Getty Images

Sometimes, on a bad night, Brad Strong wakes at 2 a.m. and can’t get back to sleep. The insomnia isn’t about his family or money or health. It’s about tariffs.

The Strong family’s three car dealerships in Salt Lake City could suffer a significant blow if President Donald Trump proceeds with a proposal to impose tariffs of 20 to 25 per cent on imported autos and auto parts.

Mr. Strong may be in for a few more sleepless nights.

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By Sunday, Mr. Trump’s Commerce Department is expected to issue an opinion on whether auto imports endanger U.S. national security enough to justify such import taxes. Mr. Trump would then have 90 days to decide whether to impose them.

The department could decide to postpone its conclusion. Or it could just hand its recommendations to Mr. Trump without making them public.

But if it does suggest that Mr. Trump impose the tariffs, Commerce would be advocating a major escalation in Mr. Trump’s combative trade policies. So far, he has stuck tariffs on imported steel, aluminum, dishwashers, solar panels and hundreds of Chinese goods. The tariffs have become a financial burden for U.S. companies that import goods and parts and have led some to pass on their higher costs to customers. Many economists worry about the eventual impact on the U.S. economy.

U.S. auto tariffs would almost surely lead Japan and the European Union to retaliate. They could also spark a rebellion in the U.S. Congress — including from Mr. Trump’s fellow Republicans — over concern that he is raising tariffs by invoking his authority to label certain imports a threat to the United States’ national security.

“I don’t believe that minivans from Canada or other allies are a threat to our national security,” said Republican Sen. Rob Portman of Ohio. “I hope the administration takes a step back and reconsiders any auto tariffs.”

The tariffs could have far-reaching consequences — on the companies that make cars, often with imported parts; on the dealerships that sell them; and on the consumers who buy them. U.S. imports of passenger vehicles and auto parts amounted to US$340-billion ($450-billion) in 2017.

All three of Mr. Strong’s dealerships sell vehicles made by German automakers — Volkswagen, Audi and Porsche. No Porsches or Audis are built in America. Only a couple of Volkswagen models are. The likely result is higher prices and lower sales for Mr. Strong and other dealers who sell imported vehicles.

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“I worry about the people that work for me and their families,” Mr. Strong said, who fears that his dealerships would have to lay off some of their 225 employees.

If 25 per cent tariffs were imposed on imported parts and vehicles, including from Canada and Mexico, the price of imported vehicles would jump more than 17 per cent, or an average of around US$5,000 each, according to IHS Markit. Even the prices of vehicles made in the U.S. would rise by about 5 per cent, or US$1,800, because all use some imported parts.

Luxury brands would absorb the sharpest increase: US$5,800 on average, IHS concluded. Mass-market vehicle prices would rise an average of US$3,300.

If the tariffs are fully assessed, IHS senior economist Peter Nagle predicts that price increases would cause U.S. auto sales to fall by an average of 1.8 million vehicles a year through 2026.

“We’re talking about an environment where sales are slowing already,” Mr. Nagle said.

In addition to Audi and Porsche, the most affected brands would be Mazda, Aston Martin and McLaren, which build all of their vehicles outside the United States. The tariffs also would hit Audi, Porsche, Volvo, BMW, Mercedes-Benz, Hyundai and Volkswagen hard. Nearly 100 per cent of Volvos sold in the United States were produced elsewhere last year. The figure is 67 per cent for BMW, 63 per cent for Mercedes, 84 per cent for the VW group and 62 per cent for Hyundai.

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“I think it would be harmful to the whole economy,” said Howard Hakes, president of Hitchcock Automotive, which has three Toyota showrooms in metro Los Angeles. “You put a 25 per cent tariff on that, you’re slowing down the train that’s rolling already.”

Mario Murgado, who owns Honda, Volkswagen, Audi and other dealerships in the Miami and Chicago areas, has a different view. He says he’s willing to sacrifice sales if necessary to make global trade fairer. Other countries, Murgado argues, assess higher tariffs than the United States does, while countries like Japan impose other barriers to importing U.S. vehicles.

“I’m just trying to do the right thing that’s in the best interest of our country,” he said.

Of the 17.2 million vehicles sold in the United States in 2017, 52 per cent were produced in the United States, according to the Center for Automotive Research. Fourteen per cent came from Mexico and 11 per cent from Canada. Ten per cent were made in Japan, 5 per cent in South Korea, 3 per cent in Germany and 5 per cent elsewhere.

There are many ways auto tariffs could be imposed. The worst-case scenario for the industry would be tariffs on both vehicles and parts. The administration also could slap levies on vehicles but not parts. Or it could suspend tariffs and use them for bargaining.

But the tariffs would likely invite retaliation aimed at U.S. farmers or other sectors of the economy, said Kristin Dziczek, a vice-president at the Center for Automotive Research.

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“If we (tax) Audis, Germany could say, ‘We don’t want your peanut butter,’ ” she said.

Mr. Trump ran for president on a vow to shrink America’s trade deficit with the rest of the world by renegotiating trade deals and attacking what he called abusive practices by other nations.

The administration has invoked a little-used weapon in trade policy: Section 232 of the Trade Expansion Act of 1962, which empowers a president to restrict imports and impose unlimited tariffs if Commerce finds that they threaten national security. The administration has used that authority to tax imported steel and aluminum. Now, it may use it on auto imports.

Especially in the case of autos, the administration seems to be relying on a broad definition of national security. Commerce Secretary Wilbur Ross last year said it could include “a very big variety of things that one would not normally associate directly with military security,” including the U.S. economy.

Mr. Trump has sought to use the steel and aluminum tariffs — and the threat of auto tariffs — as leverage in trade negotiations, including a rewrite of a North American agreement with Mexico and Canada.

To the shock of many lawmakers and businesses, Mr. Trump kept in place the steel and aluminum tariffs on Canada and Mexico even after they agreed to a new pact last year. So it’s not clear if he is content to use them as a negotiating tactic or if they’re a permanent policy from a president who has called himself a “Tariff Man.”

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“It’s hard to know exactly what the intent of the policies are,” said Bryan Riley, director of the Free Trade Initiative at the conservative National Taxpayers Union.

In her view, said Syracuse University economist Mary Lovely: “This is not a negotiating tactic. Trump is a true believer … He wrongly believes tariffs will help the U.S. auto industry.”

The auto industry itself opposes auto tariffs.

And Congress is getting restless. Sens. Pat Toomey, R-Penn., and Mark Warner, D-Va., have introduced legislation to reassert congressional control over trade. Their bill would give Congress 60 days to approve any tariffs imposed on national security grounds. It would also shift responsibility for Section 232 investigations away from Commerce to the Pentagon.

Mr. Toomey noted that Mr. Trump agreed last summer to hold off on any auto tariffs while the U.S. and EU held trade talks.

“Negotiations are continuing,” Mr. Toomey said. “That means we should not see a new round of auto tariffs.”

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