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Stephen Moore: The threat of tariffs may work

September 5, 2018

Love him or hate him, you’ve got to hand it to Donald Trump. His trade and tariff strategy — risky as it is — seems to be working. The master negotiator is hammering out agreements — first with the Europeans and now with Mexico — that are better deals for American firms and workers.

The threat of tariffs is leading to lower tariffs. The irony is if Trump keeps winning this way, he actually might end up being one of the champions of freer trade.

But Trump still is holding firm on his call for 20 percent to 25 percent auto tariffs on all imported auto parts and cars. These are said by the White House to be necessary for national security reasons, though this argument the Nissans and BMWs on the roads are a national defense concern seems more than a little flimsy. This tariff is about saving American auto jobs, and while that’s a defensible goal, will it work?

History suggests auto trade restrictions almost never deliver. In the late 1970s and early 1980s, the United States put trade restrictions on the surging Japanese auto companies — including Honda and Toyota. A landmark study by Robert Crandall, of the Brookings Institution, found that from 1982-85, those trade barriers led to a “$10-$15 billion welfare loss absorbed by U.S. consumers in 1982-85.”

Crandall argues the benefits to the domestic auto industry from those policies (about 1.3 million more cars built) were unlikely to be “worth more than a fraction of the cost.” The policies were a big net loser for the economy. Most economists come to the same conclusion regarding the Bush steel tariffs in 2002.

What is very different today from even the failed trade protectionist policies of the 1970s, ’80s and 2000s is that global supply chains make it increasingly difficult to determine what country made the car. The steel in a Ford truck might have come from Canada, the parts from Singapore, the electronic gadgetry from Germany and some of the assembly in Mexico.

The Trump tariffs are imposed not just on imported cars but on the auto parts, which makes manufacturing the car in the United States clearly more expensive.

With $50 billion of annual sales abroad, America is the third-largest exporter of cars, behind Germany and Japan. This means America might end up losing many auto jobs because of the tariffs. This is one of the reasons most of the American auto companies oppose the tariffs that are supposed to “protect” them from foreign competition.

The employment impact of the proposed 25 percent tariff could significantly add to the cost of cars made in America and result in a 2 percent drop in direct auto sector employment, rising to 5 percent and a total job loss of more than 600,000 after expected in-kind retaliation by trading partners, according to an analysis by the Peterson Institute for International Economics. This is the opposite result than what Trump had intended.

That’s only the impact on manufacturers. The Center for Automotive Research found the 25 percent tariff would slash dealer employment by more than 100,000 — an average of seven employees per dealership.

One study by the Trade Partnership predicted tariffs could (in the absence of retaliation) boost employment in the auto sector by 92,000 auto workers. It also found the tariffs would shave 0.1 percent off of overall GDP and destroy 250,000 jobs in the rest of the economy. If you are counting, that means a net loss of 158,000 American jobs.

The tariffs would raise the cost of buying a new car by as much as $2,000, which is a big dent out of family incomes. Many consumers would delay buying a new car and this, in turn, would mean more old cars on the road.

As Trump’s own Department of Transportation found in its excellent study on the cost of Obama-era fuel efficiency standards, delaying the purchasing of new cars — which are cleaner and safer — means more pollution and more traffic deaths.

To his credit, Trump has won trade concessions from the Europeans and now the Mexicans with the threat of tariffs on cars and auto parts. This is a case where the bark of Trump’s tariffs are a more effective strategy than the bite.

Actually implementing the tariffs would be negative. History proves the best way to boost the U.S. auto industry is not with protectionism, but by creating a level playing field that forces Ford and GM to compete on a level playing field. The booming economy is visible proof this Trumpian strategy is working with every other American industry from potato chips to computer chips, from bourbon to blue jeans. Why not cars?

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