Trade in a Global Economy

President Trump’s tariffs have roiled markets, and even with a postponement of some of the more onerous tariffs, the S&P 500 is still down over 8% for the year as of this writing. One of the hopes of tariff proponents is that tariffs will reshore manufacturing to American soil. However, the Cato Institute’s Scott Lincicome and Tad DeHaven argue that such tariffs, at least in the case of the automobile industry, are doomed to backfire, resulting in higher prices and less domestic production. 

Lincicome and DeHaven discuss the 25% tariffs on imported vehicles and key automative parts, nothing that car manufacturing consists of numerous interconnected supply chains. They provide a great chart illustrating the complexity of making a rear suspension assembly:

American-made cars are now a mix of American and foreign components, with less than half a car’s content typically derived from the United States or Canada:

Lincicome and DeHaven assert that tariffs are likely to increase input costs for domestic automobile manufacturers, due to tariffs on both foreign-made components and on other raw materials such as aluminum and steel. Foreign retaliation is likely to increase the pain, and continued policy uncertainty will make longer-term planning difficult. The most likely result, the authors argue, is decreased domestic production under new tariff burdens, as well as increased car prices, as much of the tariff costs are passed along to consumers.

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