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Trump’s tariffs are slowing down the automotive industries

Ever since Donald Trump has come to power in the United States, he has consistently followed a policy of economic protectionism. Buoyed by massive support in his constituency to stop globalist policies and ‘re-industrialize America’, Trump had threatened major automotive makers with a hike in tariff rates, if they took out their production houses outside the USA.

The threat indeed became a reality when he imposed a 25% tariff rate on cars coming to the United States. This impacted the global automotive industry adversely.

 

Automakers suffering the brunt

According to IHS Markit, the prices of imported parts and vehicles shot up to more than 17 per cent after Trump’s decision to raise tariff rates. This also spiked the prices of vehicles in the US, because many automotive companies use some imported parts from Mexico and Canada, which Trump has coerced to Americanize it as fast as possible. The two globally reputed brands Audi and Porsche have borne the brunt of Trump’s aggressive protectionist policies.

Mazda, Aston Martin and McLaren have also suffered badly since they build most of their vehicles outside the US. Volvo, a leading brand in the automotive industry had almost 100 per cent sales outside the US. Similarly, Mercedes, Volkswagen and Hyundai have registered most of their sales outside. Overall, the top six car manufacturing companies have reported declines in their sales globally.

Declining sales and impending losses forced General Motors to shut many of its factories in Ohio, Michigan and Maryland which in turn made 14,000 workers and labourers jobless. The sales of Fiat declined by over 10 per cent and in 2017, the total sales of the company dropped by over 8 per cent which is around 2 million vehicles.

Leading German automobile manufacturer Volkswagen’s losses have widened and are now trading 2.8 points lower. BMW’s shares have fallen by 1.6 per cent, while Daimler’s share has gone down by 2.2 per cent.

 

Reduction in operating profits

Steel and aluminium form integral parts of every vehicle. President Trump has increased tariff rates of both, as a result, it could reduce the operating profit of many Automotive companies such as Ford and General Motors. The American car market which is dominated by SUVs is likely to suffer the most since SUVs require large quantities of steel (almost 70%) and aluminium. Comparatively, Japanese and South Korean automotive industries are in a safer position, since their cars tend to use less steel and aluminium and are lighter.

 

Impact on Indian automakers

Experts believe that the aggressive tariff rates will also impact Indian automakers as the US is the third-largest export destination for domestic auto firms. In FY 18, passenger car exports to the US rose to USD 654 million from USD 3.52 million, a year ago, as per data from the Ministry of Commerce. The tariff rates are bound to impact exports and shrink the profit margins for domestic companies.

Overall, the automotive industries which once was known for generating a large number of employment opportunities to people globally are facing a severe crisis. The rise of hybrid cars, electric driven vehicles and battery-operated cars may act as a ‘game changer’ in the industry, although they are still in a nascent stage.