By Phil Eskeland
Lost in most of the media attention surrounding the upcoming summit meeting with North Korea was the announcement quietly released late on Wednesday evening from Secretary Wilbur Ross that the Department of Commerce will initiate an investigation into the national security ramification of motor vehicle imports into the United States. President Donald Trump had earlier posted a tweet promising “big news coming soon for our great American autoworkers.” Tariffs could be as high as 25 percent, replicating the import duty the U.S. currently imposes on light trucks. The rationale for this action is that “economic security is national security.” However, the next day, the U.S. automotive industry issued a statement concluding that vehicle imports do not pose a national security threat to the United States. Some have speculated that the launch of the investigation is a negotiating ploy by President Trump to compel Canada and Mexico to be more responsive to U.S. demands at the talks to renegotiate the North American Free Trade Agreement (NAFTA).
However, imposing tariffs based on an overly broad interpretation of national security could boomerang against U.S. interests as other nations would replicate U.S. actions to protect their economy. If economic security is national security, then almost every good and service can be subjected to higher duties, which would undermine the rules-based international trade regime that the U.S. has painstakingly built up over the past 70 years. There is already a hint that this study may foreshadow more action to come. Dan DiMicco, Chairman Emeritus of Nucor Steel, former trade adviser to the 2016 Trump campaign, and Chairman of the Board of the Coalition for a Prosperous America, recently said that the national security study on auto imports “is one of several that the White House is planning in the coming months” and other targeted sectors include semi-conductors and artificial intelligence.
The World Trade Organization (WTO) has generally let countries define for themselves national security exemptions. No case has been fully adjudicated on this matter yet, but that may change. Ironically, the U.S. Trade Representative (USTR) singled out eight countries for being too lax in using their national security exemption. The most recent U.S. National Security Strategy also expressed concern over China’s policies on intellectual property and forced technology transfers under the guise of protecting China’s national security. What will the U.S. government say next year?
Higher tariffs have major implications for not just for imported vehicles, but also for producers in America, including foreign transplants. According to the National Highway Transportation Safety Administration (NHTSA), there are eight car models assembled outside of the U.S. that have 50 percent of more domestic content. Would those models, such as the Honda Civic, be subject to import duties as high as 25 percent even if they are more “American” than many cars assembled in the U.S. with lower domestic content? Including automotive parts in this national security review could also disrupt valuable supply chains that have been carefully built up over the years based on market principles, not on government intrusion.
Plus, adding 25 percent to the cost of a car does not help the American consumer. Even if assembly is encouraged to move to America, the economics of pick-up trucks sales in the U.S. serves as a cautionary tale – these models have the largest profit margin because consumers are not given a full range of choices that would provide the incentive for auto manufacturers to offer the highest quality vehicle at the lowest possible price. It also takes time to build an automotive assembly plant in the U.S. – BMW boasts that it had the fastest factory start up in U.S. automotive history, but it still took 23 months to build before the first car rolled off the assembly line. What will consumers do in the interim? It also ignores the role imports play in the U.S. economy – international automobile dealers alone created 577,000 U.S. jobs with a payroll of $32 billion in 2016.
However, missing in most of this discussion are the ramifications for U.S. allies, such as South Korea. According to the Center for Automotive Research, 22 percent of motor vehicles sold in America in 2017 originated from outside the NAFTA trading bloc (Canada and Mexico). Approximately 11 percent originated from Japan, 4 percent from Germany, 4 percent from South Korea, and 3 percent from the rest of the world, including other U.S. allies such as France, Hungary, Italy, Slovakia, Spain, and the United Kingdom. South Korea also has a free trade agreement with the U.S. in which tariffs are no longer charged by either country on passenger vehicles.
According to the Korea Automobile Manufacturers Association, even with production facilities in America, South Korea exported 845,319 units to the U.S. in 2017 – 306,935 from Hyundai; 284,070 from Kia Motors; 131,112 from GM Korea (Chevy Spark and Chevy Trax); and 123,202 from Renault Samsung Motors (Nissan Rogue SUV). The Census Bureau calculated the total value of auto imports from Korea at $15.7 billion in 2017, representing an average cost of $18,613 for these vehicles, which is about half of the national average. A 25 percent tariff would raise the price of these affordable cars by an additional $4,653 on those who can least pay for it.
Complicating this issue is that the Trump Administration recently concluded negotiations to revise the Korea-U.S. Free Trade Agreement (KORUS FTA) that affected, among other items, automotive trade. Imposing new duties as high as 25 percent on passenger cars from Korea would once again be perceived as opening up the KORUS FTA on items Korea thought were closed. Plus, if more and more goods are added to the list of items determined by the U.S. to be critical to U.S. national security, such as semiconductors, these actions would be interpreted by South Korea as, once again, moving the goals posts on trade.
The U.S. should not abuse the national security exemption in its trade law to arbitrarily slap on tariffs on imported automobiles for factitious reasons. This will only devolve into a tit-for-tat trade war that will come back to harm the U.S. economy and encumber U.S. trade negotiators in their ability to persuade other nations to abandon that practice. Lowering barriers to trade should be resolved at the negotiating table, not by a series of escalating tariffs imposed on dubious “national security” grounds outside of the norms of trade remedy laws.
Phil Eskeland is Executive Director for Operations and Policy at the Korea Economic Institute of America. The views expressed here are his own.
Photo from Abdullah AlBargan’s photostream on flickr Creative Commons.