April poses yet another round of proposed tariffs from US President Donald Trump. Whereas prior announcements were largely generalized, this time around it’s all about the auto industry. If you haven’t already perused our post on the 25-percent tariff for all foreign-built vehicles, check it out. It’s a good overview of what will (maybe) take place starting April 3.
The White House also posted an official announcement with details on the executive order that President Trump signed yesterday. We’ve spent time reading this over, and the text is … a bit ambiguous. Citing concerns over national security highlighted by the COVID-19 pandemic, vehicles and auto parts imported into the US will be hit with a tariff equal to 25 percent of their value.
But there are exceptions. In fact, the wording is such that the entire order could be effectively rendered null and void without actually rescinding the order.
Let’s start with the exceptions. For starters, the tariff on auto parts applies only to “certain” parts that aren’t described in detail. And the parts tariff doesn’t begin until May 3, a month after the tariff on automobiles. While a specific reason isn’t mentioned for the 30-day difference, the order suggests Washington is still trying to figure out how to make it work.
As for cars, the tariff hits all vehicles not built in the US. That includes Canada and Mexico, but thanks to the United States-Mexico-Canada Agreement (USMCA), those cars may not be subject to the full tariff, or possibly none at all. Per Proclamation 2 the order:
“For automobiles that qualify for preferential tariff treatment under the USMCA, importers of such automobiles may submit documentation to the Secretary [of Commerce] identifying the amount of US content in each model imported into the United States. “US content” refers to the value of the automobile attributable to parts wholly obtained, produced entirely, or substantially transformed in the United States. Thereafter, the Secretary may approve imports of such automobiles to be eligible to apply the ad valorem tariff of 25 percent in clause (1) of this proclamation exclusively to the value of the non-US content of the automobile.”
In other words, Ford can tell the feds that the Maverick, which is built in Hermosillo, Mexico, has a certain amount of US-sourced parts in it. Instead of paying a tariff on the full vehicle value, Ford would only pay a tariff on the value of the non-US parts.
However—and here’s where things get a bit fuzzy—determining that value isn’t entirely clear. Among other things, some parts may qualify for “preferential treatment” according to Proclamation 4:
“The ad valorem tariff of 25 percent described in clause (1) of this proclamation shall not apply to automobile parts that qualify for preferential treatment under the USMCA until such time that the Secretary, in consultation with [Customs and Border Protection], establishes a process to apply the tariff exclusively to the value of the non-U.S. content of such automobile parts and publishes notice in the Federal Register.”
Going by this, it sounds like there’s a wide-open window in which automakers and the Secretary of Commerce can discuss a certain value for parts, or possibly give them a pass altogether if they aren’t deemed a threat to national security. That’s further supported by Proclamation 7, which sets up a 90-day period for the Secretary of Commerce to “…establish a process for including additional automobile parts articles within the scope of the tariffs described in clause (1) of this proclamation.”
Interestingly, Proclamation 7 also empowers US-based automakers and industry associations the ability to request certain imported parts be subject to the 25-percent tariff if they are not already included. Sounds to us like a good way to keep a competitor from offering a good, inexpensive vehicle to compete in an important vehicle segment like compact SUVs.
” In addition to inclusions made by the Secretary, this process shall provide for including additional automobile parts articles at the request of a domestic producer of an automobile or automobile parts article, or an industry association representing one or more such producers, where the request establishes that imports of additional automobile parts articles have increased in a manner that threatens to impair the national security or otherwise undermines the objectives set forth in any proclamation issued on the basis of the Secretary’s February 17, 2019, report or any additional information submitted to the President under clause (3) of Proclamation 9888 or clause (9) of this proclamation.”
Lastly, we get to Proclamation 9, which states the Secretary of Commerce will monitor imports and decide whether additional action is needed. On the flip side, the Secretary “shall also inform the President of any circumstance that, in the Secretary’s opinion, might indicate that the increase in duty rate provided for in this proclamation is no longer necessary.“
So to sum up: There are exceptions for vehicles built in Canada and Mexico that depend on the value of non-US parts used. But there isn’t a system in place yet to establish that value, and there’s a 90-day window to try and implement such a system. That takes us well into summer, and even then, parts could be subject to preferential treatment, which might negate the tariff completely. Meanwhile, US-based companies and industry organizations can request specific parts that might otherwise be tariff-free get smacked with the tax.
Or, the whole thing could be called off tomorrow because imported vehicles are no longer deemed a threat to national security. Folks, this could be a very long year for the auto industry. Stay tuned.
