What would tariffs on auto imports mean for suppliers?
If you work in the auto industry — for an original equipment manufacturer, supplier or otherwise — it’s likely you felt shock waves as the White House announced last month its investigation into the national security risks imposed by imported vehicles.
The questions at hand: Is the import of automobiles a threat to national security? If so, how can we, as a nation, mitigate this risk?
Citing Section 232 of the Trade Expansion Act of 1962, President Donald Trump directed the Department of Commerce to investigate this situation. While the specifics of any resulting tariff still are unknown, there is speculation a 25 percent tariff might be imposed on the roughly 8.7 million cars and related subsystems and components that are imported into the U.S. annually.
What does this mean for Michigan suppliers?
Although final assembly of vehicles is domestic for many OEMs, including foreign OEMs with large plants now in the U.S., many supply chain components are imported from overseas, which could make them subject to tariffs. OEMs and consumers alike are left wondering how these potential tariffs will impact suppliers, drivers and the aftermarket.
For suppliers, contracts will be critically important. It will be necessary to perform a thorough contract review, paying special attention to provisions related to pricing and purchasing practices, delivery terms, force majeure and hardship clauses. As for contracts currently in negotiation, the potential introduction of these and future tariffs provide an opportunity to properly allocate responsibility through clearly articulated provisions. Even if current contracts are unclear relative to tariffs, there still might be room for argument regarding responsibility for these tariffs.
Looking back on this administration’s other tariffs, these automotive tariffs also might be intended to provide leverage in trade negotiations. In March, tariffs were imposed on imported steel and aluminum. In hindsight, it appears that sweeping tariffs were, perhaps, intended to create leverage for revisiting existing trade deals. Since then, some countries have been granted exclusions and others have negotiated new trade deals, while some still are in negotiations today. And some, whose negotiations have not resulted in new trade deals, have had the tariffs imposed on their imports into the U.S.
If the current Section 232 investigation results in new tariffs on automobiles and automotive parts, the new tariffs also might include an exclusion application process for affected companies. For the aluminum and steel tariffs imposed in March, a process was developed for businesses to request exclusions on a part-by-part basis. We are hearing reports that thousands of exclusion requests have been filed, but only a few hundred have reached the public comment stage.
This slow process has led Congress to raise concerns about the exclusion process currently in place. Businesses should plan with the assumption any tariffs imposed will need to be paid and any possible exclusion from the tariffs may not be granted for months to come.
Although much remains uncertain, it’s clear the current administration is making increasing use of tariffs, and based on the steel and aluminum tariffs already imposed, these can be fast-moving conversations.
With this in mind, companies should be preparing for the impact. While customers up and down the supplier chain begin to scramble, it will be critical for businesses to understand their roadmap to negotiations by understanding their contracts. To do this, speaking with a trusted adviser who has been monitoring these developments and their potential impacts closely will help companies navigate a path to lessen the unavoidable impact these tariffs could have.
Homayune A. Ghaussi is a partner with Warner Norcross & Judd LLP who concentrates his practice in supply chain litigation and commercial contract negotiation. He can be reached at email@example.com.