Impacts of Proposed US Auto Tariffs

The auto industry is a globalized and heavily interlinked industry with a complex supply chain. Any level of artificial cost imposition is likely to have a myriad of consequences, for stakeholders operating in the key East-West trade routes. Proposed US auto tariffs would have a significant negative impact on key East-West trade route. Potential US tariffs on imported autos and parts represent a significant risk to global growth. Auto tariffs would hinder economic momentum in Germany, Japan and Korea but would be less severe for China, according to Moody’s Investors Service in a new report.

If implemented, US tariffs of up to 25% and corresponding retaliatory actions from the US’s major auto-trading partners would disrupt about $500 billion of trade flows. The economic fallout would be significant with auto tariffs distorting prices and creating inefficiencies. Consequently, the impact would reverberate across global supply chains.

Moody’s Associate Managing Director Elena Duggar, said:

Auto trade restrictions would cause a broader hit to business and consumer confidence globally in an already slowing global economy. We estimate the direct impact of tariffs to account for around 0.2 percentage points deceleration in 2019 growth for Germany and around 0.3 percentage points for Japan and Korea. Further, the indirect effects of auto tariffs could far surpass the direct trade effects as the auto manufacturing industry is among the most deeply integrated sectors in an economy. On the other hand, the impact on China would be less severe since Chinese vehicle exports are already subject to US trade restrictions imposed in 2018

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Key US ports, leading global container lines and specialist car carriers will all be adversely impacted should the proposed US auto tariffs be implemented in the second quarter of 2019, according to an impact analysis published by global shipping consultancy Drewry.

Neil Davidson, Drewry’s senior analyst for ports and terminals, said:

In our analysis we assume tariffs will be imposed in 2Q19 (mid-May) and that US importers will start passing extra costs to consumers and supply chain stakeholders by 4Q19. We also assume some US importers will absorb all or part of the extra cost, while others will delay their decision and that some foreign finished vehicle producers may lower their prices to protect sales.

Martin Dixon, Drewry’s director of research products, said:

Any imposition of US tariffs on European cars and auto parts would represent a significant escalation of transatlantic tensions between the US and the EU and given the importance of these commodities could lead to a serious escalation. Such a situation would have an even more severe impact on trade flows on Transatlantic trade routes with ominous consequences for a global maritime industry already grappling with over-capacity, rising operating costs and new regulatory compliance.

The study explored the impact of three different tariff scenarios; a low-intensity scenario with 5% tariffs imposed on all US imports of finished vehicles and auto parts, a medium-intensity scenario at 15% and a high-intensity scenario with 25% tariffs imposed.

The main findings of the paper are:

US imports: The volume of US finished vehicle and auto parts imports will likely be adversely impacted, with the most negative effect expected between 2020-2021;

Key US ports: Baltimore, Los Angeles/Long Beach and the Port of New York/New Jersey are the US ports most exposed to the effects of the US auto tariffs;

Eastbound Transpacific trade routes: With it holding 67% of the eastbound finished vehicle imports trade, Japan is the sourcing country most exposed to tariffs. China is most exposed to the auto parts tariffs, holding 61% of the eastbound auto parts imports trade;

Westbound Transatlantic trade route: Germany is the sourcing country most exposed to the Trump auto tariffs as it holds 63% of the westbound finished vehicle imports trade, and 78% of the westbound auto parts westbound trade;

Car carrier sector: With it already suffering from overcapacity, the finished vehicle shipping sector is particularly vulnerable and will naturally be negatively affected.

“Trade Impact Analysis of Proposed US Auto Tariffs”, can be downloaded here.