Why Auto Prices May Rise in the Near Future
The 45th President of the United States, Donald J. Trump, made headlines everywhere during his campaign in proposing to build a wall between Mexico and the United States. Now that he’s been elected, there has been increased discussion about the wall and the proposed import tax from Mexico to offset the American cost.
If the U.S. Congress approves the proposal on Mexican imports, this would have a significant economic impact directly on the United States consumers, specifically on the auto industry, as there are quite a number of goods we import from Mexico that are used in building cars and electronics.
According to a report released by the U.S. Commerce Department, the U.S. brought in $21.5 billion worth of motor vehicles from Mexico in 2016, accounting for eight percent of total imports from Mexico. Auto parts, which reached about $51.6 billion through November, accounted for 19% of all products shipped from Mexico; this shows a high rate of import from Mexico, with China and Canada being its closest competitors.
U.S. dependence on foreign parts has grown over the years. For example, reports from the National Highway Traffic Safety Administration in 2013 shows that twenty-five percent of the parts of a Chevrolet Malibu assembled in the U.S. came from outside the US and Canada, and this rose to thirty-five percent in 2016.
It appears President Trump is buying into a proposal made by House Republicans for a “border adjustment tax,” however, the former White House Press Secretary Sean Spicer added at the time that it was just one of several options being considered. The proposal, if approved by the Congress, would discourage imports by making them more expensive for American buyers, and make American goods cheaper to sell abroad, with the aim of reducing US annual trade deficit of more than $330 billion.
Additionally, the 20% tax would be used to pay for the border wall that Trump promised to build, and in a way seem to stay true to the promise of having Mexico fund the wall. However, Edward Allen, a trade expert at the Council of Foreign Relations, believe it’s a way of forcing American consumers to pay for the wall.
Experts believe that the 20% tariff would raise a huge concern for job security and the prices of products, especially when it relates cars and the auto industry. Research firm Baum & Associates LLC estimates most automakers would need to increase vehicle prices by thousands of dollars. Ford, for example, which is notable for domestic manufacturing, would need to consider the smallest price hike among major automakers, at about $282 per vehicle, followed by General Motors Co. at $995, according to the study.
In addition to Baum’s report, Colin Langan, an analyst at UBS Securities LLC, said the proposed border tax could raise the average price per vehicle by $2,500 which is enough to reduce annual sales by about 2 million vehicles in the US. It’s obvious that companies would have to discover new trade partners, or they would make use of items with less expensive materials. Regardless, should the tax and wall go through, a combination of both strategies to minimize the cost of production would be necessary.