Auto sector is gearing up to cruise through multiple roadblocks

When President Trump delivered on one of his key pre-poll promises by slapping tariffs on steel and aluminum imports a couple of months ago, the sector that was least impressed by the move was the automotive industry. It has been the president’s long-term goal to salvage the local metal industries by safeguarding manufacturers from the influx of imports, especially from China.

While the decision to levy taxes of 25% and 15% on steel and aluminum imports, respectively, came as a morale booster for American metal manufacturers, the steel-intensive auto industry came on the receiving end.

From the general response to the gesture, aimed at upholding national security, it seemed there were more takers for Trump’s America First campaign than those cautioned about the far-reaching implications of the protectionist policy.

The anti-tariff group justifies its stance saying that higher taxes would result in a decline in imports, forcing automakers and spare parts manufacturers to procure steel from the domestic market at substantially higher prices. The only way to absorb the higher cost is to pass it on to customers, which will result in the high-priced vehicle brands losing out to their global competitors.  Such a situation will be disastrous for the industry that is already facing multiple challenges.

Employees of small-scale spare parts manufacturers are at a higher risk as non-availability of the special steel needed for production would make it difficult for them to stay afloat.

Last month, the automotive sector suffered a fresh blow when the government launched a car imports investigation, a decision that will affect American companies selling imported vehicle models in the domestic market. It is to be noted that every car manufacturer in the US gets some of their models manufactured in assembly units abroad, either fully or partially.

The bad news is that unlike in the case of the metal tariffs, the government has not exempted companies affiliated to the North American Free Trade Agreement (NAFTA) from the car import investigation. Earlier, President Trump had sought the views of the Commerce Department on imposing a 25% tax on imports of vehicles and spare parts to the US.

The decision to levy taxes on steel and aluminum imports put the steel-intensive auto industry on the receiving end

Naturally, being the largest players in the sector, General Motors (GM) and Ford Motor (F) will be the worst hit by the trade sanctions. Among their overseas counterparts, Toyota stands to lose the most.

There are many stakeholders who do not see any merit in the move to levy tariff on the import of vehicles and spare parts, because unlike the metal industries the automotive sector has been performing well, with all the major firms registering growth in the recent quarters.

And, the ripple effect of rising unit prices has slowly started eating into the profits of a large chunk of automotive dealers operating in the country. A protracted slump in sales would see some of the dealers going out of business in the near term.

Meanwhile, there are many optimists who believe the tariffs would help local manufacturers to scale up production to balance the dip in imports, thereby contributing to the economic growth. The US is one of the largest consumer and importer of steel and aluminum in the world.

The post-tariff standoff between the US and China is going to be a drag on the local automotive industry, for the Asian giant is a key market for both American automakers and international car makers having production facilities in the US. However, China has several other options at its disposal – read Europe and Japan – to meet its growing demand for automobiles.

The trade sanction against China and the retaliatory tariff slapped by Beijing will also affect the business of metal manufacturers in China and American firms that make the products China has boycotted.

Meanwhile, in a sign that the industry is yet to feel the impact of the trade restrictions, new vehicle sales rose about 2% in May as the strong labor market and benefits of the recent tax cut more than offset the effects of higher fuel prices and rising interest rates on consumers’ confidence. Strong Memorial Day sales also contributed to the growth, with SUVs and crossovers dominating the overall sales performance.

The data came as a surprise to market watchers, who had predicted a year-over-year decline in May sales, citing various factors including the heightened trade war fears, rising gasoline prices and record high interest rates. However, the outlook for the rest of the year remains bleak, and analysts see the industry facing headwinds from the negative factors.