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The Impact of Tariffs and Trade Agreements on the American Auto Industry

The Impact of Tariffs and Trade Agreements on the American Auto Industry

The recent presidential election had the promise of tariffs on foreign prouducts. How could they and various trade agreements impact the American Auto Industry?

What is a tariff? In its simplest terms, it’s a tax on products imported into a country. Imposing these tariffs on foreign-made goods should increase consumers’ desire to buy products made domestically. This could mean industrial growth, improved production in America, and the development of new technology, but there are other challenges facing the country should tariffs and trade agreements change.

Who pays for the tariffs?

The company importing foreign goods into the country pays for the extra cost associated with the imposed tariff initially. This added cost is passed on to consumers, appearing as products that are sold at higher prices. In theory, the company building products could purchase local products, which don’t have tariffs associated with them. These added costs increase the price of products, which means if a company wants to keep the costs low, they have to either begin to produce the necessary materials themselves, shop for local products that cost less than the materials being imported, or continue to import items from foreign countries that have applied tariffs attached to them.

How do these things impact the American Auto Industry?

The vehicles we drive every day are made of thousands of parts sourced from various locations. Some domestic automakers build vehicles in foreign countries and import them into the United States, but most of the vehicles that are built in America have high percentages of parts made in foreign countries. It’s much cheaper for automakers to import these items, and some don’t have a domestic alternative, which means foreign imports are typically the only option.

The Republican platform of imposing tariffs on countries such as China, Mexico, and Canada sounds logical on paper. Unfortunately, many vehicles sold in the United States require multiple parts, including some advanced technology that is only made in foreign countries. Imposing tariffs through altered trade agreements at the percentages suggested by Republican leadership could have an immediate and lasting impact with higher prices on new vehicles. Depending on the number of foreign parts used, vehicles could cost as much as 10 to 25 percent more than they currently cost.

Which domestic vehicles are made in foreign countries?

Currently, several vehicles from domestic brands are made outside of the United States. The proposed tariff of 25 percent on Mexico and Canada has already caused an uproar in the auto industry. Despite some areas of the country building out and working to produce items that will be part of the future market, nearly every assembly plant in the country relies heavily on parts and materials from Canada and Mexico. Additionally, many popular vehicles are made in These two countries, including:

What would the increased costs do to the American economy?

After COVID-19, many Americans were upset by the increased price of goods and the bottlenecked supply chain. The automotive industry faced significant challenges with the lack of available semiconductor chips, which meant serious slowdowns in production. Imposing these hefty tariffs through new trade agreements could have a significant and immediate negative impact on overall inflation. Despite the goal to have more products built and produced in America, imposing these added costs will be problematic for most Americans, who were promised reduced costs of groceries and job protections.

Could disruption be good for the American Auto Industry?

Despite the feeling that the auto market has finally returned to normal, a change could force automakers to improve things at home. Ohio has become a hub of production and is ripe for more automotive plants to improve its local economy.

Could the auto industry transition to a 100% domestic industry? We might not see the industry become entirely domestic; some products used in vehicles might still need to be imported to ensure vehicles are complete, but that doesn’t mean most of the cars built and sold in America can be produced with American materials.

Will new tariffs and trade agreements have an overall positive impact on the American Auto Industry? Its hard to see which way things will work out in the long run. In the short term, prices and costs will likely increase with the imposed tariffs, but the long-term impact could bring manufacturing jobs back to America.

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