Weekly global economic update
What’s happening this week in economics? Deloitte’s team of economists examines news and trends from around the world.
US tariffs on automotive imports and their potential impact
- In recent days and weeks, there have been conflicting announcements regarding US trade policy. Tariffs have been proposed but not implemented, announced and then postponed or reversed, generating a high degree of uncertainty about trade policy. In addition, there were reports that the President intends to relieve some countries of the new tariffs that are planned for April 2. “I’ll probably be more lenient than reciprocal,” he said, “because if I was reciprocal, that would be very tough for people.” All this suggested that the US administration might take a more measured approach to tariffs than previously expected. And then the President made an announcement that suggested otherwise.
President Trump recently announced that, starting on April 2, there will be a 25% tariff on all automobiles and some automotive parts not assembled in the United States. This would include automobiles imported from Canada and Mexico as well as those coming from Europe and Asia. He said, “This is the beginning of Liberation Day in America. If you build your car in the United States, there will be no tariff.” When asked if there is any chance these tariffs could be delayed or reversed, he said that “this is permanent.”
The US tariffs on automobiles are, according to the US administration, meant to revive car manufacturing in the United States. In his proclamation, the President said that the automotive industry “has been undermined by excessive imports threatening America’s domestic industrial base and supply chains.” Yet, following the announcement, shares of US and foreign automotive companies fell sharply. Plus, automotive executives warned of significant price increases and a likely decline in sales. There is also an expectation that supply chain disruption will lead to a temporary decline in production.
The tariffs will apply not only to cars but to major components such as transmissions, engines, and other large parts. There is talk of extending the tariffs to other smaller components as well. In addition, regarding the existing free-trade agreement with Canada and Mexico, known as the USMCA, the President said that “USMCA-compliant automobile parts will remain tariff-free until the Secretary of Commerce, in consultation with US Customs and Border Protection (CBP), establishes a process to apply tariffs to their non-US content.” In other words, the tariffs will not immediately apply to all automotive products imported from Mexico and Canada. Yet the statement implied that some tariffs may eventually be applied.
The reason that the automotive tariffs are so important and potentially so disruptive is that nearly half of all cars sold in the United States are imported. In addition, the domestic content of the cars assembled in the United States accounts for somewhere between 40% and 50% of the value. The remainder involves imported components. The introduction of such large tariffs is unprecedented in modern times and the potential impact could be huge. If it leads to a decline in automotive employment, that could cascade to many other industries that supply the automotive industry.
Automobiles are the second most traded product in the world. Moreover, the US accounts for 21% of all the imported vehicles. In 2023, the most recent year for which data is available, the United States imported US$208 billion and exported US$65.3 billion worth of cars. The United States was the biggest importer of cars, by far, and was the fourth largest exporter after Germany, Japan, and China. In 2023, trade in automobiles amounted to nearly one trillion dollars. Thus, a disruption of US automotive trade will have significant global repercussions. The immediate response to the announcement on tariffs was that share prices of automotive companies fell sharply.
Also, some analysts have noted that the 25% tariff will be added to other existing and potential tariffs such as the reciprocal tariffs the United States promises to introduce soon. As such, the tariff on some automobiles could be much more than 25%. For example, the administration has already introduced a 20% tariff on all imports from China. Adding the 25% tariff on cars will bring the total to 45%. Also, the United States already has a 25% tariff on imported SUVs (sport utility vans). The new tariff will bring the total to 50%.
One concern is that the United States is a major automotive exporter. Yet the cars that are exported have plenty of imported components. European automotive companies export as much as 60% of the cars they assemble in the United States, using plenty of imported components. If the tariff applies to those components, US automotive exports are expected to become less competitive in global markets. It is possible that European producers might then choose to shift assembly back to Europe.
The tariff announcement sent shockwaves around the world, with political and business leaders in Europe, Japan, Canada, and Mexico facing difficult choices. In Japan, Prime Minister Ishiba said that there needs to be an appropriate response and that “all options are on the table.” A senior official said that Japan hopes to negotiate exemptions. It has been suggested that Japan could offer to boost defense spending, including purchases of US-made weapons, in exchange for tariff forbearance. South Korea’s Hyundai announced a US$21 billion investment in the United States last week. The Korean government hopes that such action might help to obtain exemptions.
Europe likewise faces difficult choices. European Commission President Ursula von der Leyen sharply criticized the tariffs. Yet she also said that “the EU will continue to seek negotiated solutions, while safeguarding its economic interests.” Another senior EU official said, “We are going to back an industry that complies with the highest standards in terms of labor rights, in terms of environmental standards. And that is key for a well-functioning economy here in Europe and worldwide.” That suggests the possibility of financial support for companies that are disrupted.
In addition, French President Macron said that he hoped “to find an accord to dismantle the tariffs.” The question, then, is what can Macron and other European leaders offer to the United States that might compel it to back down? Perhaps more defense spending and purchases of US weapons. Germany, meanwhile, took a harder approach. The economics minister, Robert Habeck, said there must be a decisive response and that “it must be clear that we will not back down.” German automobile producers are highly dependent on the US market. Also, many of the cars they produce for the US market are assembled in Mexico. On the other hand, European high-end luxury producers such as Porsche and Jaguar can probably boost prices without necessarily hurting demand due to the lower price sensitivity of their customer base.
Regarding supply chains, if automotive companies perceive the tariffs to be permanent, they will likely consider significant changes in their operating models, including undertaking assembly in the United States even if it involves importing components. US auto makers import a sizable number of vehicles from Mexico, while European and Japanese car makers import some cars and assemble others in North America.
Interestingly, it is reported that, prior to the announcement of tariffs on imported automobiles, global automotive producers were rushing to ship cars and automotive components from Europe and Asia to the United States. The goal was to get the cars to the United States before new tariffs are implemented. Consequently, ships were being rushed to Europe and Asia to collect the cars. This has been going on since the new US administration took office. In February, for example, the volume of cars shipped from the European Union (EU) to the United States was up 22% from a year earlier. Shipments from Japan were up 14%.
It is likely that the impact of tariffs on automobiles won’t show up in the form of higher new car prices for about two months while dealers sell existing inventories. However, demand might surge in the interim, leading to a quick unwinding of inventories and a sooner increase in prices. When new car prices rise, it will likely lead to a surge in used car prices. Recall that this happened during the pandemic. At that time, the rise in used car prices made a disproportionate contribution to the overall rise in inflation. Also, if new car prices rise sharply, it will likely dampen demand for new cars, thereby boosting demand for used cars.
US proposes new fee on China-related ships
- The US administration is concerned that the United States is too dependent on Chinese shipping, with particular concern that the US military relies on foreign shipping to obtain supplies. The United States has 185 ocean-going commercial ships while China has 5,500 such ships. To revitalize the US shipping industry, the administration has proposed imposing a fee of up to US$1.5 million on any Chinese-built or Chinese-flagged vessel docking at US ports. The idea is to discourage use of Chinese ships and thereby undermine China’s dominance of the industry. It is also meant to encourage more shipbuilding in the United States.
However, there are several potential problems with the plan. First, many US-based shipping companies use ships made in China and, consequently, would be subject to the fee. In fact, China accounted for 50% of global shipbuilding in 2023. Thus, a large share of ships operated by US companies were built in China. It has been suggested that US shippers can offset the higher cost by shipping goods to ports in Canada and then transporting the goods by land to the United States. Of course, if tariffs are applied to Canadian imports, this wouldn’t be effective. If goods are diverted to Canada, it would hurt US port facilities.
US consumer spending slows
- The US government reported recently that, in February, real (inflation-adjusted) consumer spending grew slowly despite a strong rise in income. Households boosted their savings. Meanwhile, underlying inflation appeared to accelerate modestly in February. This data spooked already jittery investors who pushed equity prices down sharply. Moreover, bond yields fell while the value of the dollar dropped against the euro and the Japanese yen. The drop in bond yields, despite a signal of potentially accelerating inflation, likely reflected concern that the economy could be weakening, thereby ultimately leading to easing of monetary policy later this year. In any event, let’s look at the data.
In February, real disposable personal income (which is after inflation and taxes) was up 0.5% from the previous month, driven by strong growth of wage income as well as transfer payments from the government. At the same time, real consumer expenditures increased only 0.1% from the previous month. This resulted from an increase in the personal savings rate, which rose from 4.3% of disposable income in January to 4.6% in February. This was the second consecutive month in which the savings rate increased.
Meanwhile, the real increase in consumer spending, which followed a sharp decline in January, included a 1% increase in real spending on durable goods from the previous month, a 0.5% increase for non-durable goods, and a 0.1% real decline in spending on services. It was the first decline in real spending on services since January 2022.
The relatively strong growth in spending on durable goods might reflect frontloading of spending due to anticipation of tariffs. The decline in spending on services, however, could reflect anxiety about the state of the economy. This would be consistent with data from the recent survey of consumer confidence conducted by the University of Michigan. The confidence was down sharply in February. It also fell again in March, perhaps boding poorly for spending in March. Also, the survey found weakening confidence among most cohorts, including across both political parties. The survey authors said that anxiety about tariffs played a role.
Finally, the report on spending and income included data on the Federal Reserve’s preferred measure of inflation; the personal consumption expenditure deflator, or PCE-deflator. In February, this measure was up 2.5% from a year earlier, the same as in January. However, when volatile food and energy prices are excluded, core prices were up 2.8% in February versus a year earlier, up slightly from the 2.7% seen in January. Notably, the core PCE-deflator was up 0.4% from the previous month, the largest such monthly increase since January 2024. Thus, underlying inflation clearly accelerated in February. However, one month does not make a trend. Moreover, the direct impact of tariffs on prices will not likely be felt for several months.
