Trade, Tariffs and Sacred Cows

As a result, trade policy is rarely black or white and tends to be more nuanced.  Take for example the 10% tariff on sedans made in America and exported to Europe. It’s certainly true that it dwarfs the 2.5% tax that are imposed on sedans imported from Europe.  However less talked about is the 25% tariff imposed on trucks and SUVs imported from Europe into the US. If no tariffs are the goal for European and American auto imports to one another, that would mean all of the aforementioned trade barriers should go away.

This past April Ford announced that it will reduce the number of sedans it produces to just two – the Focus and the Mustang. The key reason is sedans have far lower margins than trucks and SUVs. “We’re going to feed the healthy parts of our business,” CEO Jim Hackett stated, “and deal decisively with the parts that destroy value.”  GM and Fiat Chrysler appear likely to adopt a similar focus on higher margin trucks and SUVs.

With all auto tariffs removed with Europe, might US Carmakers sell more sedans in Europe? Possibly, but it seems likely that US assembled Honda and Toyotas exported from America may be primary beneficiaries. On the other hand, is it likely that US automakers experience margin pressure to the more profitable Trucks and SUV portion of their business if tariffs on European built SUVs are lifted? It seems inevitable that any increased sedan sales would be dramatically offset by increased BMW, Audi and Mercedes SUV imports from Europe that may even come with lower price tags.

The Heritage Foundation claim that “Free trade enables more goods and services to reach American consumers at lower prices, thereby substantially increasing their standard of living” seems well founded. However, all nations will continue to ring fence industries that they consider strategically or politically important. Accordingly, getting to global trade that is completely free of tariffs is a wonderful goal, but may never be fully attained.

While threatened tariff wars may make headlines and provoke outrage, the reality is getting closer to free trade is often a complicated process. And the outcomes won’t be universal wins for all US industries and may actually impose further body blows to an already embattled American manufacturing sector.

Hafeez Esmail is the Chief Compliance Officer at Main Management, a participant in the ETF Strategist Channel.

A pioneer in managing all-ETF portfolios, Main Management LLC is committed to delivering liquid, transparent and cost-effective investment solutions. By combining asset allocation insights with smart implementation vehicles, Main Management offers a unique approach that translates into distinct advantages for our clients, including diversification, cost efficiency, tax awareness and transparency.