Trump's Big Border Tax: Answers for Car Shoppers

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Nissan facility in Aguascalientes, Mexico

CARS.COM — President Donald Trump has threatened escalations in tariffs on foreign-made goods if U.S. manufacturers, including automakers, don't bring more manufacturing stateside. That could impact 4 in 10 cars that U.S. shoppers buy, and the effects — both good and bad — could extend beyond the sticker price of your next car.

Related: Trump and the Auto Industry

Can Trump actually do this? What are the chances he would, and how would that affect the auto industry? Here's what you need to know.

Trump has threatened a "big border tax" for companies that import products into the U.S. — specifically a 35 percent tax for any company that "leaves our country for another country, fires its employees, builds a new factory and then thinks it will sell its product back into the U.S. without retribution or consequence," he said in a series of tweets on Dec. 4. Trump has trained his threats on companies from GM and Toyota to German automakers at large, and U.S. manufacturing was a major theme in his meetings this week with the Detroit Three.

Can the President Really Do This?

Following through on the threats may be easier to accomplish than one might think. Politico reports that Congress would have to approve new tariffs — something House leadership reportedly isn't too keen on — but lawmakers have previously given the president broad power to impose his own trade barriers if he can declare an economic emergency. CNN, meanwhile, outlines three ways Trump can impose barriers sans Congress.

These new tariffs would run afoul of existing policy, which allows free trade between the U.S. and 20 countries — including Canada and Mexico under the 23-year-old North American Free Trade Agreement, which Trump wants to renegotiate. It could also stir trouble with the World Trade Organization, a group of 164 countries that includes the U.S. and is committed to rules affecting trade.

Cars.com has reached out to the White House but has received no response.

How Many Cars Could It Affect?

By Automotive News' count, automakers built 12.2 million light vehicles in the U.S. in 2016, versus 2.3 million in Canada and 3.5 million in Mexico. A Cars.com analysis of that sales and production data and information from automakers finds that about 60 percent of U.S. light-vehicle sales in 2016 came from cars and trucks built in the U.S.; about 40 percent of U.S. sales were imported from Mexico, Canada or abroad. Only one automaker — Tesla — can claim every car it sells in the U.S. is made here. Several automakers, such as Mazda, Jaguar Land Rover and others, have no U.S. assembly plants.

Automakers have pledged to do more in the U.S.: Volvo has planned a plant in South Carolina, while the Detroit Three plan additional investments in their U.S. facilities. But production in Mexico, which currently sends about 1.8 million cars annually to the U.S., is also expected to increase. The Center for Automotive Research expects Mexico will see its production capacity double by 2020 from its 2010 levels.

How Likely Is It to Happen?

Experts agreed that a unilateral 35 percent tariff is unlikely, but you can expect some action to prompt more U.S. manufacturing. Kristin Dziczek, who directs the Industry, Labor & Economics Group at CAR, calls the 35 percent figure "negotiation posturing," to an extent.

"Everyone who considers themselves a savvy negotiator will go into a negotiation with a really unappealing option in their pocket," Dziczek told Cars.com. "You want to move the deal to what you want. You want to make there be something that the other party really wants to avoid."

Late Thursday, Trump announced plans for a 20 percent tax on all Mexican imports to fund construction of a border wall. It’s unclear how he plans to enact the tax, however.

What Would Happen If the Tariffs Occurred?

Should Trump forge ahead with a 35 percent tax, experts say the prices for those cars will immediately go up — and automakers will protest mightily.

"I would think they would scream bloody murder because, in response to NAFTA, they've spent 20 years building their North American supply chains crossing back and forth and back and forth across the border," said Alan Deardorff, a professor of economics and public policy at the University of Michigan. "I'd have to believe that they'd hate that, and they'd let him know."

Many automakers might stop selling the cars that would be subject to those tariffs — especially low-profit models such as the Nissan Versa.

"I would just say, 'Well, we're not going to sell them here anymore.' You just can't," AutoPacific analyst David Sullivan said. "Thirty-five percent tariff on anything — [even a] 10 percent tariff on an $11,990 car, takes away from a car, from having a new car that people can afford."

Would the U.S. Get More Jobs?

Not as many as one might think. Globalized production would "erode the likelihood that the United States would exclusively benefit in securing replacement production of vehicles or production of parts that had been imported from Mexico with any future trade restriction initiatives the United States may consider," CAR wrote in a paper this month. What's more, nearly half the cars built in Mexico are less-profitable small cars — a group whose production would likely move outside North America and not into the U.S., CAR added.

Assuming that larger cars built in Mexico eventually returned to U.S. production, CAR estimates that a withdrawal from NAFTA and a return to tariffs would eventually return the production of about 1 million more cars to the U.S., resulting in an estimated 22,200 new jobs and anywhere from $4.7 to $6.5 billion in new factory investments. That doesn't include any new jobs or investments related to auto-parts suppliers.

But that same withdrawal would cost about 450,000 sales in the U.S., CAR warns. It would also raise prices on Mexican auto parts and disrupt the stream of parts that went into the cars still built in Mexico. Once the dust settled, that would cost at least 31,000 U.S. jobs, CAR projects.

"I just don't think it is [as] easy to unwind everything that's down there and the systems that are in place, as Trump says it is, without some catastrophic reaction," Sullivan explained. "It will grind things to a halt, because I don't think supply chains with hundreds of thousands of parts — [with] auto parts, it just takes one supplier to balk at a tariff and say, 'I'm not doing that.' "

Didn't the 'Chicken Tax' Spawn More U.S. Production?

The "chicken tax" refers to a 53-year-old trade dispute between the U.S. and Europe that resulted in then-President Lyndon Johnson authorizing a 25 percent tariff on imported trucks, which was later relaxed for minivans and SUVs but remains in place for pickup trucks. In its wake, foreign-based automakers now build pickups from the Toyota Tundra to the Nissan Titan and Honda Ridgeline in places like Texas, Mississippi and Alabama.

Achieving that same effect now could take years, perhaps even longer than a potential two-term Trump presidency.

"You have a vehicle you're already making somewhere — let's say Mexico," Sullivan said. "You build that for five or six years, and then you are already working on the next model, and you also have to build a plant. I mean, there's a lot of things that have to happen in a timeline. It's not like by the end of 2017 we'll be making Versas in Indiana. That's not realistic."

How Are Automakers Preparing for This?

It's too early to say. We asked every major automaker about the prospect of Trump tariffs. Several had no comment. Others, like Nissan and GM, are taking a wait-and-see approach.

Stephanie Brinley, a senior analyst at IHS Markit, took a positive tone on the industry response. Changing production footprints is "difficult to do overnight," Brinley said, but "automakers have had to work within issues related to foreign trade laws and tariffs for decades." She expects them to individually adapt — and effectively, at the end of the day.

Editor’s note: This post was updated Jan. 26 with news of President Trump’s proposed 20 percent tax on Mexican imports.

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Senior Consumer Affairs Editor Kelsey Mays likes quality, reliability, safety and practicality. But he also likes a fair price.  Email Kelsey

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