Is Trump About To Launch A Global Auto Trade War?
Will the United States start another trade war, and if so, what might be the ramifications for India and the world? The answers are ‘maybe’ and ‘three-fold’.
On Feb. 17, 2019, the end of a 270-day investigation period dating back to May 2018, the United States Department of Commerce delivered to President Donald Trump its findings on whether imports of autos and auto parts threaten American national security under Section 232 of the Trade Expansion Act of 1962, as amended. Now the President has 90 days to decide what to do. As India well knows, President Trump invoked Section 232 against steel and aluminum, agreeing with the January 2018 Commerce Department investigation findings that imports of this merchandise undermine U.S. national security.
The Commerce Department recommends slapping a tariff of up to 25 percent on all foreign assembled vehicles and parts, plus targeted tariffs on components and technologies used for electric vehicles and automated, internet-connected, and shared vehicles. No exceptions, other than the ones Canada and Mexico—the top exporters of passenger vehicles to the U.S. by value and volume, in the 2013-2018 period—negotiated in Side Letters to the new United States Canada Mexico Agreement. But, Congress has yet to pass this NAFTA 2.0, so producer-exporters in Canada and Mexico cannot rely on the Side Letters.
The only restraint on the President from driving America into this new trade war is a non-binding understanding with the European Union and Japan that as long as those countries negotiate a free trade agreement with America, he will hold off on imposing Section 232 duties on their cars and car parts. The EU and the U.S. are starting discussions, and never entirely ditched their Trans-Atlantic Trade and Investment Partnership (T-TIP). Japan is likely to start talking with the U.S. this or next month, too, though Japan’s clear preference—for good reason—is for America to come to its senses and rejoin the rebranded Comprehensive and Progressive Agreement for a Trans Pacific Partnership (CPTPP).
Despite repeated calls for the Modi Administration to turn on the ignition for serious FTA negotiations with America, its FTA policy is, well… more akin to peddling aimlessly on an old-fashioned, single-speed bicycle. So, Indian producer-exporters should be downright worried about what the future holds for what they send to the U.S. If the President gets into the driver’s seat of a(nother) trade war, then watch out for three accidents: a national security crash, a political crash, and an economic crash.
The National Security Crash
The term ‘national security’ may be wrecked beyond recognition. Not a single American auto producer supports the Section 232 investigation, and of the 2,300 comments received between May and November 2018, only three favored it. The most important support came from the United Auto Workers, but even it called for targeted action and reinvestment in America’s automotive industry. Most commentators laugh at the idea that foreign passenger cars, light trucks, and parts for these vehicles threaten American national security by eroding its domestic auto industry. As Ohio's Republican Senator Robert Portman puts it: “There is no way that minivans from Canada are a national security threat.” He should know: he served as the United States Trade Representative to President George W. Bush.
Yet, the Commerce Department wears protectionist blinkers when looking at ‘national security’. The blinkers come from the National Security Industrial Base Regulations, and go beyond the quantity of autos and auto parts imports, actual and projected defense requirements, current and prospective U.S. production capacity, displacement of U.S. jobs and skills owing to imports.
The blinkers also include an analysis of whether any of these factors depends on the majority ownership of auto and auto parts producers. Are they American or foreign-owned?
Should ownership matter? No, unless the owners are nefarious interests from an axis of evil. The reality is this:
- EU firms manufacture 2.9 million cars in America every year, employing 120,000 Americans in doing so.
- If car dealerships and car parts retailers are included, EU companies employ 420,000 Americans.
- Germany alone helps power America by employing over 113,000 workers across 300 auto factories in the U.S., and is the largest exporter of cars from America, with many such exports shipped to China.
Similar cases can be made for Japanese and Korean companies: plenty of production, good jobs, not nefarious.
The Political Crash
Politically, Congress may be forced to amend Section 232. There are two proposed bills to rewrite this statute, including one by Senator Portman. Their gist is to shift investigative authority from the Commerce to the Defense Department, and give Congress the power to disapprove of any Presidential invocation of the statute. If Trump steps on the gas, then Congress likely will advance these bills, and he will crash head-on into Congress over this legislation.
Congress will argue the Pentagon is best poised to:
- know its supply chain for military and dual-use equipment,
- apprise whether it relies on foreign sources too heavily, and
- decide whether those sources are friends or foes.
Section 232 calls for a three-part interdisciplinary evaluation, and for lateral, synthetic thinking, the Defense Department is unmatched.
Moreover, faced with an imperial presidency, Congress will warn the Trump Raj of the Constitutional doctrine of separation of powers and equality of the three branches. With respect to foreign trade, the Foreign Commerce Clause of the Constitution (Article I, Section 8, Clause 3) gives Congress the power to regulate trade, so the President operates under authority it delegates. Already, the President is crashing into this argument in two cases before the U.S. Court of International Trade. He is alleged to have crossed the Constitutional median between the executive and legislative branches when he drove the Section 232 actions against steel and aluminum.
Simply put, Section 232 is not an airy golf cart. It’s a gas-guzzling Hummer.
If the President doesn’t put his foot on the brakes, then Congress—with the U.S. auto industry and the rest of the world cheering on Congress—might take away the keys from the self-described “Tariff Man”.
The Economic Crash
Economically, steering the world into an auto trade war surely speeds up the possibility of a crash in growth, perhaps even a recession. Most obviously, a 25 percent tariff on autos will raise costs to American consumers. They will pay about $5,000-7,000 more per vehicle. A 25 percent tariff on auto parts will translate into an increase in the price of a U.S.-origin car of $2,000. Thus, annual U.S. car sales may fall by 4-5 million units, as Americans defer purchases or buy used cars, many of which are less environmentally friendly than new cars.
Even a more conservative estimate says a 25 percent tariff on cars would cause job losses of 336,900 in auto and auto-related sectors, boost the cost of the average light-duty vehicle by $2,750, and drive down annual new car sales by 1.3 million units.
As big a role as the targets of the current Section 232 actions—steel and aluminum—play in world trade, cars and parts play an even bigger role, especially when upstream and downstream implications are considered.
The scope of the 25 percent tariff America is poised to impose potentially affects speedometers and other dashboard items (they’re made in India), gearboxes (made in India, too), chassis (yup, made in India), and engines (ditto).
That scope also affects components for new technology vehicles – merchandise in which India assuredly seeks to gain an inside track vis-à-vis Chinese competitors seeking a comparative advantage.
To be sure, India is not particularly vulnerable to a Section 232 action against autos. Its exports to the U.S. of new passenger vehicles are miniscule, though possibly trending upwards. In 2017, it ranked 24th by value and 23rd in the world by volume, well behind Turkey and South Africa.
Rather, India’s vulnerability is with respect to auto parts. By 2025, India is projected to boast the world’s fourth-largest auto components industry. That’s thanks to its allowance of 100 percent equity stakes by foreign investors through the “automatic route,” proximity to European, Middle Eastern, and Asian markets, and two prominent sub-sectors: organised original equipment manufacturers producing high-value added sophisticated merchandise, and unorganised producers offering low-value added items for after-market used car needs.
Just how vulnerable is India’s auto components sector to a Trumpian-driven war in this sector?
India has diversified its export destinations for its auto parts to over 160 countries. But, America is the number one destination.
Auto parts account for 2.3 percent of India’s gross domestic product and directly and indirectly employs 1.5 million people. The Modi Administration’s 2016-2026 Automotive Mission Plan calls for those figures to rise to 12 percent of GDP and 65 million jobs. Trump might drive that ‘Plan’ into a wall.
The message for Indian workers and their families in automotive clusters, namely, Mumbai-Pune-Nasik-Aurangabad in the west, Chennai-Bangalore-Hosur in the south, and Delhi-Gurgaon-Faridabad in the north, is watch out for a swerving American vehicle.
India’s vulnerability is worsened by the fact that it has a bilateral trade surplus in auto parts with the U.S. that averages about $1 billion annually.
President Trump thinks trade balances threaten American national security, so he typically races to run them over, as he is doing with respect to steel and aluminum.
If the President steps on the gas, then all that stuff, wherever made, will need to find a market – or not be made. Which means folks, albeit Indians and other foreigners, might suffer income declines and job loss. Alternatively, that stuff can go to third countries, such as Bangladesh, Brazil, and Germany, each of which, after the U.S., are top importers of Indian-made auto components, or to new markets in which India seeks inroads for this merchandise, namely, Romania, Japan, Vietnam, and Colombia.
But, such trade diversion is an exhaust fume on which third-country domestic producers of like products might choke. They might push their governments to boost tariffs on those items from India and other exporters, and lodge anti-dumping and countervailing duty suits against them. The world has seen this car race before: it’s the one involving steel and aluminum, thanks to the Section 232 steel and auto tariffs. Ironically, fans of this race typically are disappointed. They think their incomes and jobs are protected, and more work is on-shored. The truth is robots do, or will do, much of any new work that is on-shored.
Reckless Driving
Reckless driving is an offense. It would be reckless to start a trade war over autos and auto parts, given the national security, political, and economic crashes that would result. Further, it would be reckless to start a trade war, given that two other trade wars, over steel and aluminum, and with China, are still being fought with no victory in sight. Ergo, to start a trade war over autos and auto parts would be a reckless driving offense.
Raj Bhala is the inaugural Brenneisen Distinguished Professor, The University of Kansas, School of Law, and Senior Advisor to Dentons U.S. LLP. The views expressed here are his and do not necessarily represent the views of the State of Kansas or University, or Dentons or any of its clients, and do not constitute legal advice.
The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its Editorial team.