How Tariffs are Affecting the Auto Industry
In July 2018, the auto industry’s trade groups published an open letter to President Trump, urging him not to increase import tariffs on autos and auto parts, on the grounds that such a move might jeopardize US jobs, the economy, and even undermine US technological leadership. You can read the full open letter here.
Nevertheless, the Administration went ahead with its plans in September, and imposed import tariffs on $200B of Chinese goods — escalating a trade war between the two largest economies in the world.
The first tariff increase, a 10% tax on imports, went into effect on September 24, and will rise to 25% at the start of 2019.
This has left many wholesalers, particularly those in the auto industry, wondering how the tariffs will affect them.
What does this mean for the industry?
It’s impossible to know for sure what these will mean for the auto industry, but it is hard to find anyone who is willing to argue that a 25% tariff on imports will lead to lower prices. In fact, the Center for Automotive Research recently published a study that modeled the potential impact of varying tariff increases applied to all trading parties (and separately to trading parties excluding Canada and Mexico) and forecasted some dramatic declines for the industry.
- 2 million fewer new vehicles sold per year
- Total US employment losses of nearly 714,700, and GDP losses of $59.2 billion
- A loss of 117,500 of 1.1 million U.S. new-car dealership jobs, with the average franchised dealership losing seven jobs
- Increases in the cost of vehicle maintenance and repair due to higher automotive parts prices
- An increase in used car prices due to heightened demand and constricted supply
The study anticipated that in all probability, a deal would eventually be struck between the US and Canada/Mexico, so the model below shows the estimated economic impact of a 25% automobile & automotive parts tariff applied to all US trading partners except Canada & Mexico.
These are sobering numbers indeed, indicating a rise in vehicle price of nearly $2,500, a decline in US jobs of nearly 200,000, and a negative impact on US GDP of around $15B!
The US Trade Deal with Canada and Mexico
Recently, on October 1, the US, Canada and Mexico agreed to replace the North American Free Trade Agreement (NAFTA) with the United States-Mexico-Canada Agreement, or USMCA. While the deal has yet to be ratified by all three countries, there are some key elements that will impact the auto industry.
Under NAFTA, cars and trucks had to have 62.5% of their components manufactured in the US, Canada or Mexico in order to qualify for a zero tariff. Under the proposed new USMCA, that percentage has been increased to 75% to qualify for zero tariff, with the intention of encouraging car makers to use locally sourced components in preference to Chinese imports. That should provide some relief to North American auto parts manufacturers.
Another component of the USMCA calls for 40 to 45 percent of automobile content to be made by workers who earn at least $16 an hour by 2023. The intention here is to increase wages in Mexico, which in turn will lead to more competitive manufacturing in the US and Canada. However, this will cause the cost of components to rise, so margins will become smaller unless sales dramatically increase.
Pundits can argue whether the USMCA is a revolutionary deal or simply an updated version of the original, but whatever your position, there is no doubt that a trade deal between the US, Canada and Mexico is positive. It should provide some degree of relief for the US auto sector, but there is still plenty of pain to come as the 25% tariff rates on China start to bite in early 2019.
The key then to being prepared for the coming impact that tariff changes will have on your business is to gain a more clear picture of all of your sales activities and inventory levels in order to make better decisions as margins are squeezed.
Sales will come under more scrutiny than ever, and stiffer domestic competition along with increased cost of components will make it more difficult to turn a sufficient profit. By effectively managing your supply chain to optimize stock at the store level you can be prepared for shifts in demand and make sure you’re not missing out on sales.
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As a powerful point-of-sale analytics tool for auto parts wholesalers, krunchbox can help you optimize inventory, increase collaboration and drive incremental sales, so that you can offset challenges that you may face as tariffs on your products increase.
Krunchbox will help your business quantify the value of missed sales, make smarter inventory decisions, improve your relationships with buyers and more. Schedule a free demo today.