The implementation of 25% tariffs at the US borders will be announced on April 2. The Trump administration’s goal is twofold:
1- Collect revenue with the ultimate objective of replacing income tax
2- More concretely, to relocate production to American soil.
A company that wants to access the American market must pay an entry fee. The magnitude of the revenues would reflect the attractiveness of the American market. These high revenues would allow for a corresponding reduction in income taxes. This weekend, Peter Navarro, a close ally of Trump, spoke of customs tariffs as excellent news for households.
The question is who will pay the tax?
Is it the American consumer if the company passes on the tax in its sales price?
Or will the foreign company reduce its margin to maintain the same price?
The outcome will depend on the competitiveness of the local market and the sector of activity. But we cannot assume a priori that foreign companies will spontaneously agree to reduce their margins. This is not what past experience, particularly the tax increases of Trump’s first term, teaches us. The consumer will pay.
For Trump, foreign companies must be encouraged to set up in the US to take full advantage of the American market. It’s never that simple. If the US trade deficit is so large, it’s partly because production conditions in the US are unfavorable compared to other locations. What would make American sites more competitive? A tax? Not sure.
The automotive market is interesting from this perspective. Since the creation of the North American Free Trade Area on January 1, 1994, manufacturers’ factory locations have been optimized between Mexico, Canada, and the United States. Production chains allow products to circulate between the three countries to increase the efficiency of the process. The tax will potentially make American cars more expensive, since Mexican and Canadian products will pay the tax.
Relocating production to the US is not easy. The newest factories are in Mexico and Canada. Those located in the US are old and inefficient, even though they have been modernized. Relocation would require a considerable investment effort that manufacturers are not prepared to make. Furthermore, it would take a considerable amount of time.
The automobile market risks being destabilised for a long time, either by price increases or because it has to relocate, but with considerable investment beforehand.
The automobile industry is a key component of the American industrial process. If this sector is disorganized and loses efficiency, the entire economy will be weakened.