Howes: Trump trade war threatens unintended consequence
In his State of the Union address, President Donald Trump touted the fact that “many car companies are now building and expanding plants in the United States — something we have not seen in decades. Very soon, auto plants and other plants will be opening up all over the country.”
Maybe not. The trend could be imperiled if the White House delivers as soon as Thursday on the president’s promise to slap 25 percent tariffs on imported steel and 10 percent on imported aluminum, a one-two punch to the manufacturing-heavy industrial heartland that improbably delivered Trump to the Oval Office.
The moves — opposed by congressional Republicans, Wall Street, stalwart allies from North America to the European Union, even the president’s own economic adviser, Gary Cohn, who quit in protest — likely would mean rising prices for domestically sourced metals used by Detroit’s three automakers and their foreign-owned rivals operating in the United States.
Unintended consequences loom. If history is any guide (and it usually is), American steel producers would seize the opportunity to raise prices for its U.S. customers. Ford Motor Co., to cite one example, sources 95 percent of the steel and 98 percent of the aluminum it needs for its U.S. plants from U.S. suppliers.
Second, the trend of repatriating auto production back to the United States — such as Fiat Chrysler Automobiles NV announced in January with its Ram heavy-duty pickup — could end should automakers choose to assemble vehicles in Mexico with less-costly steel sourced from south of the border.
And as hometown automakers contend with the prospect of double-digit increases in their cost of steel and aluminum, German, Japanese and South Korea competitors would be charged just 2.5 percent to import foreign-made vehicles containing finished foreign steel — unless the administration raises tariffs on them, too, to redress the imbalance, sparking a wider trade fight.
“There seems to be a fairness issue,” says a ranking industry source close to the situation. “What you’re hearing from domestic producers is, ‘Don’t make us uncompetitive globally.’”
Almost anything is possible from the president, whose tendency to make sweeping pronouncements with few details is exemplified by his tariff gambit. On Wednesday, press secretary Sarah Huckabee Sanders said the administration might exempt Canada and Mexico — or it might not, a decision (or negotiating gamesmanship) that instills little confidence in business or foreign capitals.
“I have not seen what” the president “is proposing,” said U.S. Rep. Debbie Dingell, the Dearborn Democrat whose district includes AK Steel Holding Corp. and is not far from the moribund McLouth Steel site Downriver. “That’s still part of the problem. A lot of people are raising concerns. We have to make sure there are not unintended consequences.”
Still, Dingell says she’s sympathetic to Trump’s effort. Six Republican members of Michigan’s congressional delegation signed a letter Wednesday urging the president to impose tailored tariffs on such trade violators as China and Russia, lest sweeping tariffs force allies like Canada, Mexico and the EU to retaliate.
How the tariff details shake out will determine their likely financial impact on the bottom lines of Ford, FCA and General Motors Co., among others. In a note, Barclays said the potential import tariffs would have “meaningful implications” for the auto industry, which accounts for roughly 25 percent of the nation’s annual steel consumption.
The near-term shocks likely would not be as severe as some investors seem to think. Barclays estimates that steel and aluminum combined total just 6 percent of materials costs, meaning the proposed tariffs would cost Ford an estimated $260 million and GM about $215 million this year.
The bigger risk could be what Brits call the knock-on effect. Should the administration stay the course on tariffs — or escalate by raising tariffs on German-built sedans, Japanese luxury cars or Korean compacts — the foreign response could widen the negative impact in the heartland.
Already, the EU is threatening retaliatory tariffs on Wisconsin-built Harley-Davidson motorcycles, Kentucky bourbon and Levi Strauss jeans from San Francisco. Artfully chosen, those: the first comes from the home state of House Speaker Paul Ryan, R-Wis.; the second comes from Senate Majority Leader Mitch McConnell’s home state; and the third comes from House Minority Leader Nancy Pelosi’s district.
“When you stand back, the economics of these tariffs don’t make any sense for the United States,” said Ellen Hughes-Cromwick, former chief global economist at Ford and now interim associate director of social science and policy at the University of Michigan’s Energy Institute.
“We consume more steel than we produce. I don’t see any data driving these decisions ... any evidence-based policy-making here. Retaliation now is something that is more likely.”
The politics are suspect, too. Trump won the Electoral College with big assists from voters in the industrial heartland, especially Michigan. The home of the Motor City produces more cars and trucks than any other state in the country, and its sprawling supply base depends on the relative health of the automakers and auto sales to keep the business humming.
An escalating trade war that embroils more parts of the manufacturing economy, or spreads to the Midwest’s rich agricultural sectors, could undercut economic growth and further slow already plateauing auto sales — hardly the foundation for a robust Trump re-election campaign come 2020.
Daniel Howes’ column runs Tuesdays, Thursdays and Fridays. Follow him on Twitter @DanielHowes_TDN, listen to his Saturday podcasts, or catch him 3 and 10 p.m. Thursdays on Michigan Radio’s “Stateside,” 91.7 FM.