Understanding the Section 232 investigation on automotive imports

On May 23, U.S. Secretary of Commerce Wilbur Ross initiated, under the Trade Expansion Act of 1962, a Section 232 investigation to determine whether automobile and automotive part imports threaten to impair the national security as defined in the legislation. While this follows a similar strategy by the administration that recently resulted in tariffs on various forms and grades of aluminum and steel, there are a couple of interesting differences that stand out in these two investigations.

First, for steel and aluminum, it was the president who signed a memorandum instructing the secretary to begin the Section 232 investigation. For automotive, it’s described as self-initiated by the secretary after a conversation with the president.

Second, for aluminum and steel, there was an explicit tie to national security: “Our military often needs specialty steel alloys that require unusual production skills and are used for armor, vehicles, ships, aircraft, and infrastructure.” For automotive, the U.S. Department of Commerce (DOC) states, “This investigation will consider whether the decline of domestic automobile and automotive parts production threatens to weaken the internal economy of the United States, including 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 DOC states that U.S.-parented automakers account for only 20 percent of global automotive research and development and American auto parts manufacturers account for 7 percent of global supplier R&D.

The reaction

Unlike the Section 232 investigations of steel and aluminum that brought industry and public reactions that one would expect — industrial producers for, industrial consumers against, support from states with mills, and the like — this Section 232 investigation on vehicle and component imports brought generally negative reaction from all sectors of the automotive industry, its trade associations and the legislators in high automotive employment states. It will be interesting to see how the administration manages the public hearing testimonies that will need to occur as part of the investigation process.

Over the next nine months or so — the maximum time allowed for the investigation — you’ll see strong comments from all sides of this argument. That is the nature of these public fights. The investigation may not turn up a risk to national security, or like with steel and aluminum, the result may be establishing tariffs with various exemptions and exclusions. In either case, it would be wrong to assume it’s an empty threat. Most likely, if it doesn’t happen or its outcome is minimized, it will be because of the loud response by affected countries, vehicle manufacturers, suppliers, and their trade associations.

The implications

With a timeline of up to 270 days for the investigation and development of recommendations, followed by 90 days for presidential review, and another 15 days for implementation, the greatest concern facing the original equipment manufacturers (OEMs), suppliers, state governments, and others is uncertainty and the resulting delay in vehicle program and other investment decisions. It’s hard not to tie this Section 232 investigation to the North American Free Trade Agreement (NAFTA) negotiations. Remember, this strategy aligns with the administration’s preference for bilateral versus multilateral trade agreements. In addition to adding pressure for NAFTA negotiations to conclude before the July elections in Mexico and the November elections in the United States, this strategy could push the European Union (EU) to look at its 10 percent vehicle tariff and Japan to adjust their various non-tariff barriers — the U.S.’s largest automotive trading partners after Canada and Mexico.

This strategy could push the European Union to look at its 10 percent vehicle tariff and Japan to adjust their various non-tariff barriers...

On the automotive parts side, if tariffs are applied across the board on the $143 billion of imported automotive parts, the implications for the OEMs, their suppliers and aftermarket are significant. On the other hand, if potential tariffs are targeted, perhaps to the components called out in the U.S. DOC release: connected vehicle systems, autonomous vehicles, fuel cells, electric motors and storage, advanced manufacturing processes and other cutting-edge technologies, the implications will be constrained as these components are not as significant on current vehicle content. Of course, vehicles with these advanced technologies will be significantly effected in the near term.

Next steps

The U.S. DOC published the investigation notice in the Federal Register on May 30. This triggered off the following timeline:

• June 22 – Written comments, requests for public hearing appearances, and expected testimony are due to the U.S. DOC. These will be posted to the public docket.
• July 6 – Rebuttal comments to these written comments are due.
• July 19 and 20 – Public hearings will convene at the U.S. DOC.

Capital and product development investment delays won’t span the full 270 days allowed for the investigation, but it will likely take an extended period to gain insight into this specific investigation along with the outcome of related trade negotiations. The impact of this Section 232 investigation on automobiles and automotive parts for the industry and the U.S. economy will need to be evaluated in the total context of the outcome of related trade negotiations — specifically NAFTA, but also the EU over steel and China over intellectual property.