Auto industry braces for fallout of trade war and tariffs.
Less than two months ago there was a line in the sand drawn on getting a NAFTA 2.0 Agreement put in place by the Trump administration.
Mid-May came and went without a renewed NAFTA being secured which left some to ponder: “What’s really gonna change in a couple of months?”
Well, the answer to that question seems to be “A whole lot.”
Consider that after previously exempting Canada and Mexico, the President of the United States decided to impose tariffs of 25 per cent on Canadian and Mexican steel and 10 per cent on aluminum coming from both countries on June 1st.
And so we began the slippery slope towards an all out trade war with a country that has always been our largest trading partner and our staunchest ally.
I think the Canadian Government has been unequivocal in saying that it is not going to simply roll over and take any deal for the sake of having a NAFTA deal.
Even before those tariffs could be imposed, on May 23rd the President launched a second Section 232 investigation into imported automobiles as a threat to the national security of the United States under the Trade Expansion Act of 1962 – the same grounds on which he justified the steel and aluminum tariffs.
It would seem that both of these Section 232 exercises are aimed at exerting maximum pressure on Canada and Mexico to get them back to the negotiating table to finalize a NAFTA deal that the President has described as “more fair” to the United States. Reading between the lines I guess that means from Trump’s perspective a new NAFTA has to be “less fair” to Canada and Mexico.
I think the Canadian Government has been unequivocal in saying that it is not going to simply roll over and take any deal for the sake of having a NAFTA deal. Canada was content to work towards making NAFTA a better deal for all, but it’s been clear from the get go that the President was only interested in making NAFTA a better deal for one. How this exercise in competing objectives comes to a mutually beneficial conclusion remains to be seen.
With respect to the tariffs, Canada reluctantly imposed its own set of equivalent tariffs on U.S. steel and aluminum and dozens of other products strategically chosen to impose pain in Republican held districts.
It remains to be seen whether this retaliatory action will pour more fuel on this incendiary mess or have the desired effect of demonstrating to the President and his minions that no one wins in a trade war – there are only different degrees of losing.
While we watch the results of this train wreck, an even larger, existential threat to the Canadian automotive industry — and by proxy the Canadian economy — is looming with the President’s threat to impose Section 232 tariffs on imported automobiles and parts.
It is unclear at this time what constitutes as an “imported automobile” or “imported parts.” but this could conceivably mean that every time a component or sub-assembly crossed the border into Canada and then returned to the United States for further build up prior to being assembled into the vehicle, that those components would be taxed at 25 per cent every time they went across the border.
The perverse outcome of this exercise would be that the “American” subsidiaries manufacturing in Canada — Ford, GM and FCA — would be hit the hardest given their higher degrees of cross-border integration as compared to Honda and Toyota.
At this point, submissions have been made to the Department of Commerce, including submissions from the Governments of both Canada and Mexico. The next step in the process will be for the Department to conduct a series of hearings that will take place July 19-20.
Which groups and organizations are invited to attend may indicate the direction of the Trump administration’s overall decision on this matter. However, one thing this inconsistent President has been consistent about is doing what he said he was going to do. He indicated that he was going to impose tariffs on imported vehicles — so that is what we all should be planning for.
The glimmer of hope is that on the odd occasion, the President has shown a remarkable ability to turn 180° on an issue when persuaded by the right people that his original positioning would prove damaging or problematic.
More publicly “Little Rocket Man” has become a dignitary worthy of a state visit and Vladimir Putin, recently denounced by Trump will also received a state visit.
Let’s hope he has a change of heart with respect to auto tariffs or the Canadian auto industry — and with it the Canadian economy — are doomed.
With roughly 85 per cent of Canadian vehicle production going to the U.S. market, a tariff of 25 per cent would be impossible to absorb, making vehicles built in Canada uncompetitive in the U.S. market.
If vehicles are priced uncompetitively it doesn’t take too long for sales to fall off, and then orders from the manufacturer to fall off and then production to fall off to the extent that the plant is temporarily shut down.
The same challenge holds true for Canadian parts manufacturers who — unless you are a Magna, Linamar or Martinrea — are supplying vehicle manufacturers in Canada or shipping the bulk of their production to the U.S. market. This situation is a “no-win” for Canadian parts makers.
With auto production and automotive parts production slowing markedly or stopping, the deleterious effects would soon be felt through the indirect and direct supplier communities — from the local pubs and diners to tourist attractions and other areas of discretionary spending. All of this works its way through the broader economy.
It remains to be seen whether this retaliatory action will pour more fuel on this incendiary mess or have the desired effect of demonstrating to the President and his minions that no one wins in a trade war – there are only different degrees of losing.
So there is a lot riding on trying to avoid these auto tariffs if at all possible, but it will be Americans that will be the only ones with any ability to challenge the President on the folly of taking this path.
All auto manufacturers in the U.S. and their respective members have denounced the auto tariffs and have highlighted in some detail the pain such tariffs (and anticipated retaliatory tariffs) would have on the American automotive industry — not just those countries upon which the President wishes to impact.
Finally, on July 1st, Mexico elected an avowedly leftist, populist government by an overwhelming majority under the leadership of three-time presidential candidate Andrés Manuel López Obrador — or AMLO for short.
Staunchly opposed to President Trump and eager to demonstrate Mexican strength and resilience in the face of tariffs and continued demands for a “wall,” it will be interesting to see how quickly (or if) NAFTA trade negotiations can get kick-started again.
AMLO is said to be predisposed to getting a deal done in the caretaker period before his government assumes power on December 1st. The only problem with that calculus is that the U.S. has its own mid-term elections on November 6th, which could dramatically change the face of Congress leaving it potentially even more reticent to finalizing a NAFTA deal.
Fasten your seat belts.
