Has this administration thought its tariff policy through?
A couple of days ago, I wrote about one way in which the Trump tariffs could hit automakers based in the U.S.:
Before “liberation day,” tariffs on cars imported from the EU and Japan were charged at a rate of 2.5 percent. Now, those tariffs will be 15 percent, a lot higher than before (but less than the 25 percent levied since earlier this year).
But as was pointed out on Axios:
U.S.-built cars . . . are taxed 25% on imported parts (except for those that comply with the U.S.-Mexico-Canada trade agreement signed by Trump in his first term). That applies not just to the Detroit 3 carmakers but also to foreign automakers with U.S. plants.
Not only that, U.S.-based carmakers must pay 50 percent tariffs on imported aluminum and steel.
This will have consequences for such companies and for the Americans who would like to buy the cars those companies make.
Ford Motor said Tuesday that it lost money in the second quarter as tariffs took a toll on its business. The company also said it expected tariffs to cost it a total of $2 billion this year. . . .
Tariffs lopped $800 million from Ford profits during the second quarter, the company said. Its estimate of $2 billion in tariff costs for the year includes the impact of cost-cutting and other measures the company is taking in response to Mr. Trump’s trade policies.
Ford must pay tariffs even though it makes most of its vehicles in the United States because, like all carmakers, it uses imported parts and materials. Those include tariffs of 50 percent on imported steel and aluminum.
The good news for consumers is that U.S.-based companies have so far done their best to avoid passing on these costs to car buyers, manufacturing as many cars as they could before the tariffs hit (there’s a message there). They have also absorbed much of the cost: Ford’s current expectation is that its prices will only rise by 1 percent this year. Beyond that, it cannot say.
Of course, eating most of the higher tariff costs will mean that Ford’s profits will be lower than would have been the case. That could mean less money to pay and hire workers, less money to invest in new productive capacity, less money to spend on innovation, and less money to pay out to shareholders.
Is this an opportunity for U.S.-based aluminum companies, Alcoa say, to come to the rescue? Ford would not pay tariffs on that production.
Indeed, but there is a catch — in fact, several catches.
It takes about two years to secure permits for a new smelter and five to seven years to build one. A new smelter would cost $5 billion, which is about 80 times Alcoa’s profit last year.
Few companies will be prepared to commit to something like that until they can be more certain that this new tariff regime (or something like it) will endure.
So why not restart an existing production line?
The Wall Street Journal:
Merely restarting a production line at Alcoa’s Indiana smelter would cost $100 million and take a year or more, yet it would add only 50,000 metric tons of capacity. That’s 1.2% of U.S. imports. Even if all American smelters ran at full capacity, the U.S. would still need to import about 3.4 million metric tons of aluminum — the equivalent of five large new smelters.
The U.S. would also need much more and cheaper electricity. Alcoa says producers would need firm contractual energy-price commitments of about $30 per megawatt hour for at least 15 years to be globally competitive. Manufacturers in the U.S. typically pay from $60 to $100 per megawatt hour.
Oh.
Around three-quarters of Alcoa’s North American primary aluminum is produced in Canada, thanks to cheap hydropower. Comparative advantage, it’s a thing. About 70 percent of that production is used by U.S. customers.
The Wall Street Journal:
Producing all of the aluminum that the U.S. now imports would consume about as much power as six large nuclear reactors produce in a year. Wouldn’t that electricity be better deployed powering data centers for AI?
Opportunity cost, it’s a thing.
Has this administration thought its tariff policy through?
Appropriately enough, later today (11 a.m. Eastern) Dominic Pino and I will be holding the inaugural Capital Questions webinar, the first in a series continuing this fall. The topic? Tariffs, trade dynamics, and what to expect next.
If you are interested in attending, find more details here.