The automotive world is a global economy and one of the major producers has been China. How will current and future tariffs affect the industry?
In major media coverage of the tariffs against China, we hear about how it will impact large scale companies like the automotive manufacturers. We haven’t heard how it will affect those who’s companies give us the parts to make our projects unique or more functional: the automotive aftermarket. I spoke with three people who will be seeing an impact because of them in many ways – Tony Pellegrino, owner of GenRight Off-Road; Edward Lee, General Manager of Titan 7 Wheels; and SEMA’s Senior Director of Federal Government Affairs, Stuart Gosswein.
What’s a Tariff?
If you don’t remember from school, just didn’t pay attention, or don’t remember, you may not know what a tariff is and how it works here in the United States. In very simple terms, it’s a tax on imported goods. You might also hear it called a duty or a trade barrier, it mostly depends on who you’re talking to or how they happen to feel about taxes on that particular day.
According to Investors.com, the purpose of a tariff is to limit products that enter a country. “The purpose of a tariff,” as they explain in their article, “which a government imposes to raise the cost of a particular import, is to limit or reduce the amount of that good imported into the country. Making an import more expensive can improve the economics of producing that product domestically.” This can be used for good or bad purposes and, again, it depends on who you ask and which side of the trade they are.
In the US, the tariff is paid by the person or company importing the good. If you want to look at it that way, anyhow. The reality is that tariffs and other costs are passed down to consumers in full or partially in some cases. Again, going back to that same Investors.com article, “Yet who ultimately pays the tariff cost is more complicated. Walmart could pay $3 of the $6 cost and pass half of it on to customers (The example in their article was using a 10-percent tariff on a $60 bike to make a $6 tariff cost), whose price would rise by $3. In that case, Walmart profit shrinks and customers are left with a thinner wallet.”
Keep in mind, that article doesn’t go into production, markup, or anything else. It was just about tariffs. There are also other ways countries that export can reduce tariff costs by doing something like currency manipulation.
What Has Been Going On?
When I talked to SEMA’s Senior Director of Federal Government Affairs, Stuart Gosswein, tariff negotiations had recently broken down, but some improvements were occurring on China’s side. As with a lot in government issues, there is more than just the headline catch going on behind the scenes and tariffs are only a part of the broader issue.
As Stuart told me, “The Trump Administration is seeking to negotiate new trade agreements with China, the European Union, Japan, India, Brazil and other countries. President Trump has used tariffs as a primary tool for gaining negotiating leverage, especially in the U.S.-China negotiations, but with unclear results to date. The U.S. is seeking to lower the U.S.-China trade deficit and deter intellectual property theft and forced technology transfers by the Chinese companies and the government.”
Stuart went into further detail on that last part, “In 2018, President Trump directed the U.S. Department of Commerce to investigate whether these imports threaten U.S. national security, having expressed concern about increases in the volume of auto and auto-part imports over the past three decades, along with foreign barriers to U.S. automotive exports. Specific concern has been cited for protecting U.S. innovations in engine and powertrain technology, electrification, lighter-weight materials, advanced connectivity and autonomous driving.”
While the organization for the automotive aftermarket wants change, Stuart stated, “SEMA supports the U.S. trade goals but opposes the tariff strategy. SEMA has joined the ‘Americans for Free Trade’ Coalition, which includes hundreds of major companies and organizations that oppose the tariffs.”
He went on to explain that the Coalition believes that tariffs will hurt the country in more ways than just importing goods or even the automotive sector, but the entire US economy. “The fear of trade wars and economic downturns have produced uncertainty,” said Stuart, “with many companies deferring on key financial and investment decisions and being confused whether they should be resourcing their supply chains. Businesses need certainty to thrive.”
It Just Costs Importers, Right?
It’s usually thought that a tariff only affects those who import, but there was a side effect greater than that. I asked Tony Pellegrino, owner of GenRight Off-Road about how it affected him. Founded in 2006, all GenRight products are manufactured in Simi Valley, CA and specializes in aluminum Jeep Wrangler parts. “We American manufactures got hit 1 year ago,” said Tony, “when President Trump put tariffs on raw materials causing a spike in prices and a shortage of those materials to manufacturers like us.” It was the domino fall of supply and demand as Tony pointed out.
Many US-based manufacturers panicked and sought out domestic-based material providers who didn’t import metals and materials from China. For many, many years, steel and aluminum were sourced out of the Chinese market rather than stateside because it was cheaper. “Many of the other American Made companies in the industry tried to soak up the increase in costs of raw materials. I can tell you it was not possible. We raised prices and it hurt our projected growth for 2019,” he stated.
Doing Business in China
So, if you are one of those businesses who manufacturer and import from China, how did that affect you? I asked Edward Lee, General Manger and Co-Founder of Titan 7 about that. Titan 7 is an aftermarket wheel brand that launched in late 2016. They specialize in forged wheels for street-performance and track focused cars but are planning to launch in the street and performance truck market soon.
“This affects our business greatly as our partner factories are in China,” Edward clarified, “Originally, the tariff for our classification of goods was 2.5-percent. Last year it increased an additional 10-percent, and recently, it went up an additional 15-percent to a total of an additional 25-percent.” A yearly increase is usually easier to swallow, but unpredictable and sudden increases in the span of months is hard to deal with for any company.
“Now our President is threatening to increase it to a whopping additional 30-percent,” he continued, “It will obviously put a strain on our business as we have to increase prices so that we can still operate. However, we must take a hit on our margins as we cannot expect to increase the price of our product accordingly and stay ultra-competitive in the market.”
So, What Will Happen Now?
As of the writing this article, China has waived some tariffs on US goods coming into their country as President Donald Trump wanted to raise tariffs even higher just prior to that waiver. What have many concerned is that this may trigger another recession like the one experienced in the early 2000s. Even so, a company will only survive if they can be flexible enough to make it work.
“Obstacles and challenges will either lead to companies failing or, on the flip side, they get resourceful and innovate,” said Edward. “First thing is we look at our existing operation and look to where we can improve efficiencies and streamline processes to save money which can offset cost increases. We also utilize the challenges to think about what else we can do to improve things. Perhaps look at bringing manufacturing back home, or other countries. All cards are on the table.”
“All I can say is that we have a plan in process and we’ll be fine,” he said when it came to how Titan 7 will deal with tariffs, “I think that’s what will separate ourselves compared to other wheel companies that don’t have their ‘ducks in a row.’ We’ll see!”
Tony over at GenRight sees the problem beyond tariffs, “The public has gotten spoiled by all these companies competing for their business based on price alone. Good products cost money. They are better made, and have better features incorporated into them. Companies need to decide what they are doing – making good parts or making cheap parts! My experience is that people are willing to pay for American made.”
Even Edward agrees to a degree, “Really, it doesn’t matter where you are getting products from. If you planned out your product line and how you go about things in a smart and efficient manner and stay within proper ethical and lawful guidelines, you’ll be fine. For example, if you are just trying to sell something cheap and act accordingly in a fly by night manner, you probably won’t last long. If you work on branding, establishing great customer relationships, and you support and participate in the industry, I think there’s a good chance to stay in the game for some time.”
SEMA, though, continues their fight in Washington D.C., as Stuart pointed out, “The threatened tariffs on automobiles and auto-parts are potential bargaining chips as the U.S. negotiates new trade agreements with the European Union and Japan. President Trump provided negotiators until November 13 before deciding whether to pursue these tariffs and, if so, on which vehicles and parts. SEMA and seven other major trade associations representing the broad scope of the auto industry formed the Driving American Jobs Coalition [https://www.drivingamericanjobs.com/] to oppose the imposition of tariffs on automobiles and auto-parts.”
Big Bite or Big Bark? The IEEP Threat
Back in August of 2019, President Donald Trump stated on Twitter that he demanded all US businesses doing trade in China to leave immediately. When pressed, our President cited the “Emergency Economic Powers Act of 1977” on the social media platform. The International Emergency Economics Powers Act, that passed on October 28, 1977 by former President Jimmy Carter, is as stated on Wikipedia, “a United States federal law authorizing the president to regulate international commerce after declaring a national emergency in response to any unusual and extraordinary threat to the United States which has its source in whole or substantial part outside the United States.”
While the Congressional Resource Service states that the Act gives a sitting President “broad authority to regulate a variety of economic transactions following a declaration of national emergency,” many Constitutional scholars have stated that the Act cannot force companies out of China as President Trump has stated. Congress also has the power to end any national emergency by a joint resolution.
Edward over at Titan 7 believes it won’t happen at all. “This act is used to for more extreme cases where there needs to be a definable threat to U.S. Security.” He admitted, “Our President did Tweet that he wanted companies to look for ways to manufacture out of China,” Edward continued, “but you can’t force or tell private companies what to do. Instruments of economic change like tariffs will cause plenty of that, and as long as there aren’t any acts of hostility, the International Emergency Economic Powers Act would not come into play.”
While the IEEP wouldn’t affect Tony at GenRight, he believes that having businesses in the US is only a good thing. “It is the right thing to do,” he stated.
Politics Suck, but It Affects All of Us
I’m not here to make a political grandstand on Carbage. Even so, this issue hits all of us. It doesn’t matter if we own an import business that has ties with China or wholesale trade in overseas products or just buy them for our vehicles. We’re all going to be impacted if we aren’t experiencing it already.
Raising tariffs like we have been doing recently isn’t the long-term solution, I believe that. I also believe that we do need more manufacturing here in the US. More jobs here is a good thing, even in a global economy. However, if your belief is that these tariffs or ending production in China will mean better quality and less fake products, you’re sadly mistaken.
We make crappy products; we just don’t make them cheaply. You can buy a terribly made bumper in Florida just as much as you can get one from China. Quality boils down to the company doing the production, not the country of origin.
The biggest thing that would potentially happen in the US is the reduction of forgery products and intellectual property theft sanctioned by the state. Even then, it doesn’t stop it in other parts of the globe. You can still buy fake name brand automotive products produced somewhere other than China, like Indonesia for instance.
All this situation reduces to is this: tariffs are only going to hurt the consumer in the end. The costs will be passed on to them no matter if the reason is a tax or material sourcing. While it is good to have major companies manufacture here in the United States, attempting to force them here by tariff or declaration isn’t going to do it. They’ll only go to where it is cheapest to produce and sell where it is most profitable to market.
On the flip side, smaller companies will continue to manufacture stateside. They rely on the marketing of being “Made in America” or “Produced Locally.” However, as we have explored earlier in this article, tariffs will still cause their costs to rise due to sourcing materials here and the supply dwindling. That, in turn, will cause their profits will fall. They will potentially look at laying off or letting employees go to reduce the cost of doing business. They may also look towards more automation, especially as those machines get more advanced and cheaper to produce.
The tariffs don’t hurt China, they won’t even hurt companies that look to manufacture outside of the US. They only hurt the American businesses and people they appear to protect.
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