Why Tariffs Won't Create Jobs Or Help The Auto Industry

At a mid-November hearing before the United States International Trade Commission, several U.S. automaker groups complained that proposed car tariffs would undermine the success of the U.S.-Mexico-Canada Agreement (USMCA) and cause heavy job losses for the car sector.

The main U.S. car-producer association — the US Alliance of Automobile Manufacturers disapproved of (i) the rules requiring higher North American regional content of imports, (ii) the side letters signed with Canada and Mexico that introduce de facto quotas for car imports exempted from any increases in tariffs, and (iii) the ongoing Section 232 National Security Investigation that may end-up with tariff imposition on national security grounds.

According to the Alliance, the negative economic fallout from car tariffs may include the loss of about 700,000 jobs across the country. This is not surprising given the sizeable footprint of the U.S. car industry that contributes about 3.5 percent to GDP and employs more than seven million workers. Already the imposition of the steel and aluminum tariffs has cost the industry billions of dollars.

At first sight such a negative reaction from an industry that is about to obtain substantial protection against foreign competitors seems paradoxical. After all, it is common knowledge that curtailing imports benefits domestic producers at the expense of consumers within the “protected” area.

A valid explanation for this seeming paradox could be the high degree of international specialization and integration of U.S. domestic car production into global value chains. The United States imported about $340 billion of passenger vehicles, light trucks and car parts in 2017. Although it recorded a trade deficit in the automobile sector, its exports were nonetheless significant at almost $144 billion. If we look for example at the economic relations with the European car manufacturers, we learn that in 2017, the latter made close to 2.9 million passenger cars in the U.S., representing 26% of the total U.S. production. Surprisingly enough, several EU carmakers have their biggest plants not in the EU, but in the U.S. And about 60% of all passenger cars they manufacture in the U.S. is exported to third countries, including the EU itself.

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