Two years of trade tumult, and more on the horizon

WASHINGTON — At the halfway mark of President Donald Trump's term, the auto industry is still coming to terms with the costs of two years of roller-coaster trade policy.

And more turmoil is expected in 2019 as Trump tries to make good on campaign promises to reduce bilateral trade deficits and stimulate domestic manufacturing by restricting or punishing imports.

Many automakers and suppliers were once dismissive of Trump's campaign threats to unwind NAFTA and impose more tariffs, reasoning that business-friendly advisers and industry executives would prevail upon him to moderate his stands.

Instead, the sector faced a tumultuous trade environment starting with the administration's first week, when Trump withdrew the U.S. from the 12-nation Trans-Pacific Partnership, which was seen as a way to check China's power.

Since then, his team forced Mexico and Canada into a NAFTA rewrite, renegotiated a 2012 free-trade deal with Korea, engaged in a tit-for-tat tariff war with China, imposed tariffs on imported steel and aluminum that triggered retaliation from trading partners and threatened new tariffs on foreign autos and auto parts on national-security grounds. And it's about to launch trade talks with the European Union and Japan overshadowed by the specter of punitive action on autos.

"Prior to Nov. 8, 2016, it felt like an opportunity to expand, and for [us] to have more access to foreign markets for U.S.-built vehicles," said a representative for a Japanese automaker who is not authorized to speak publicly. "But unfortunately, since that time things have changed dramatically."

"Is it better than no NAFTA? Absolutely."

The Detroit 3 support the NAFTA revision, called the United States-Mexico-Canada Agreement, while foreign brands, which rely more on components sourced outside the region, are more lukewarm.

Matt Blunt, president of the American Automotive Policy Council, said USMCA preserves market access and "laid down good precedents" by introducing trade language prohibiting currency manipulation and requiring partners to accept U.S. safety standards.

At the same time, maintaining metal tariffs on Mexico and Canada undermines U.S. competitiveness by adding almost $400 to the cost of producing a vehicle in the U.S., he said.

Industry leaders had expected those tariffs to fall away after the trading partners signed the new regional pact.

Uncertainty still surrounds USMCA because a bitterly divided Congress has yet to approve it. The government shutdown over money for a southern border wall will likely set back deliberations because people at the U.S. International Trade Commission analyzing the deal's economic impact have been furloughed for three weeks, with a March 15 deadline looming.

The shutdown itself doesn't bode well for bipartisan support of USMCA, analysts and industry representatives said.

Some automakers are also nervous about trade talks with Japan and Europe. Washington's negotiating objectives with Japan are vague when it comes to autos. "That could mean they are trying not to telegraph their position, or that they are leaving an opening for an early harvest deal by being less confrontational," said an auto industry source who didn't want to be identified because of the issue's sensitive nature.

Jeffrey Schott, a senior fellow at the Peterson Institute for International Economics, interpreted the U.S. position as focused on limiting Japanese auto exports to the U.S. and trying to encourage more direct investment, especially because Japan is unlikely to open its market further after allowing more access through the new EU-Japan free trade agreement.

There is fear the U.S. will try to impose an import quota or pressure Japan into voluntary export restraints, as it did in the 1980s, the Japanese auto company representative said.

Meanwhile, trade talks with the EU remain in limbo because the sides can't agree on an agenda for negotiations.

The U.S. wants to discuss trade liberalization and agriculture, but not autos, where it's protected by the long-standing 25 percent tariff on imported light trucks. EU officials say they want to discuss all trade, except for agriculture, as well as improving access to government contracts.

The interplay of the various trade moves could further complicate the Trump administration's task in stimulating domestic production.

"To make the new rules of origin in the revised NAFTA effective, you have to ensure there are restraints — more likely quotas — on foreign competition," Schott said, "because once USMCA provisions enter into force, that's going to increase production costs for vehicles made in the U.S.

"And if you continue steel and aluminum tariffs," he added, "that BMW vehicle in Spartanburg is going to cost a lot more than a car exported from Germany and paying a 2.5 percent tariff."