June 2018

New Auto Investigation Would Be A Body Blow To The FTZ Program

The U.S. Department of Commerce started an investigation into automobile imports to determine whether they "threaten to impair the national security" of the United States, the agency said in a statement on Wednesday night.

The surprise announcement this week comes at a time of worsening friction over trade with the United States. The new U.S. probe follows similar ones on steel and aluminum carried out under Section 232 of the Trade Expansion Act of 1962.

The United States carries out a brisk trade in automobile exports and imports, primarily with traditionally friendly countries including Japan, Germany and South Korea. Car companies, and their suppliers, from Germany and Japan are big users of the FTZ Program and punitive tariffs on their parts will be an unwelcome expense.

U.S.-based automakers and auto parts makers also manufacture products in Mexico and Canada and then import them into the United States.

"I wonder how much this has got to do ... with Mexico and Canada," John Woods, CIO of Credit Suisse, told CNBC's Bernie Lo. "I suspect there is some leverage going on" that's designed to increase pressure on those countries as they try to renegotiate the North American Free Trade Agreement with the United States. In Tokyo, Japanese automakers, which had been under pressure from the firmer yen, saw stock market declines: Toyota Motor and Honda Motor were both lower on their home market by more than 2 percent.

Mitsubishi Motors and Mazda Motor were hit especially hard, both falling more than 4 percent.

Stocks of South Korean automakers traded broadly lower in Seoul on Thursday, with Hyundai Motor and Kia Motors sliding.

"There is evidence suggesting that, for decades, imports from abroad have eroded our domestic auto industry," Commerce Secretary Wilbur Ross said in a statement.

The Commerce Department announcement said the investigation "will consider whether the decline of domestic automobile and automotive parts production threatens to weaken the internal economy of the United States, including by potentially reducing research, development, and jobs for skilled workers in connected vehicle systems, autonomous vehicles, fuel cells, electric motors and storage, advanced manufacturing processes, and other cutting-edge technologies."

The department claimed in the statement that imported passenger vehicles account for 48 percent of passenger vehicles sold in the United States, up from 32 percent 20 years ago, while "employment in motor vehicle production declined by 22 percent."

Minutes before the announcement, the White House released a statement saying that President Donald Trump asked Ross for the probe.

"Core industries such as automobiles and automotive parts are critical to our strength as a Nation," the White House statement said. Hours before though the President tweeted "Big news coming soon for our great American Autoworkers. After many decades of losing your jobs to other countries, you have waited long enough." Reports came out at the same time that North American Free Trade Agreement talks between Mexico, Canada, and the U.S. have stalled over auto manufacturing rules.

Two Washington D.C.-based automaker groups are slamming President Donald Trump's decision to launch an investigation into auto imports, which could lead to tariffs on foreign-made vehicles.

"To our knowledge, no one is asking for this protection. If these tariffs are imposed, consumers are going to take a big hit," said John Bozella, President of Global Automakers, a trade group representing foreign manufacturers doing business in the U.S. "This course of action will undermine the health and competitiveness of the U.S. auto industry."

The legal mechanism for the investigation "has rarely been used and traditionally has not focused on finished products," said Gloria Bergquist, spokeswoman for Auto Alliance, a group that represents foreign automakers like Volkswagen and BMW in addition to U.S. manufacturers like GM and Ford.

"We are confident that vehicle imports do not pose a national security risk to the U.S.," Bergquist said, and automakers' advocates argue that domestic production remains strong.

"Contrary to the assumption underlying the investigation on import vehicles, the U.S. auto industry is thriving," Bozella said.

"Last year, 13 domestic and international automakers manufactured nearly 12 million vehicles in the U.S. The auto sector remains the leading exporter of manufactured goods in our country," Bergquist said. "During the last 25 years, 15 new manufacturing plants have been launched in the U.S. – resulting in the creation of an additional 50,000 direct and 350,000 indirect auto jobs throughout America – and new plants are on the way."

"We urge the Administration to support policies that remove barriers to free trade and we will continue to work with them and provide input to achieve that goal," she said.