By Ryan Boyle

The back-and-forth over the U.S. reciprocal tariff threat dominated headlines this week, but it is just one of the new trade conflicts.  The week prior, the Trump Administration placed enforced new 25% tariffs on automotive imports. 

The automotive sector has led the movement toward globalization and cooperation. Every major automaker has at least one factory in the U.S. to serve the domestic market, just as U.S. manufacturers have built facilities abroad.  Automakers have formed joint ventures and even sold competitors’ vehicles under their own brands.  While a vehicle’s point of final assembly is easy to identify, every car contains parts sourced from suppliers around the world.  

This has placed the vehicle industry at the red center of trade tensions.  Despite the success of global supply chains serving the sector, all nations take pride in their domestic brands and often target imports with tariffs. 

Americans purchase about 16 million cars and light trucks every year.  Of these, roughly a quarter of finished vehicles are imported from outside North America.  Autos from Mexican and Canadian factories will get a partial reprieve from the new tariffs, as the value of U.S. content within North American imports will be deducted from the levy.  Vehicles made entirely outside the continent will face the full value of the tariff.

Japanese and South Korean manufacturers have the most to lose from the auto tariffs.  While the largest Japanese marquees often rank high on lists of vehicles with the most U.S. content, the nation’s smaller competitors rely more heavily on importing.  Korea’s manufacturers are still developing their stateside footprints.

Trade discussions among these nations are advanced.  A free trade agreement with Korea (KORUS) was ratified in 2011, following five years of negotiations that spanned two presidential administrations in both nations.  KORUS was amended in the first Trump term to encourage more U.S. auto exports to Korea.  Trump also signed a limited free trade agreement with Japan in 2019, but it did not include vehicles. 

Until this week, auto trade was tariff-free in both directions between the U.S. and Korea.  Japanese vehicles faced a 2.5% tariff at U.S. ports, while Japan does not have a tariff on U.S. autos.  Now, both will face a 25% duty. 

The new taxes on autos affected purchase behavior even before they were finalized.  U.S. consumers rushed to purchase vehicles: import activity and final auto sales surged in the first quarter. Higher prices are in store; demand will consequently be diminished.

Japan and Korea are likely to counter, potentially in cooperation with China.  Leading exports from the U.S. to these nations include liquefied natural gas, oil, aircraft, machinery, pharmaceuticals and meat, all of which could be targeted.  U.S. autos may be included, symbolically; the larger vehicles made in the U.S. suit neither the tastes nor the infrastructure of these markets.

Foreign automakers have made substantial U.S. capital investments, with Hyundai opening a vehicle and battery plant in Georgia just last month.  The tariffs are meant to encourage more of this kind of foreign direct investment, but time will tell how they affect the perception of doing business in America.

Optimally, the tariffs will prompt negotiations that will lower trade barriers.  But demands by the U.S. have lacked detail, and substantial discussions have not begun.  Some White House advisors see free trade as a mistake, and tariffs as a necessary step to rebuild U.S. industrial capacity.  The auto tariffs may be here to stay, and could grow larger.

The ever-improving safety, durability and efficiency of automobiles has been supported by global collaboration.  We hope the current trade fracas is only a brief detour on a long journey of progress.