Mercantilists in the 18th century implemented policies that restricted imports and protected domestic industries, at the expense of trading partners. Since then, economists have developed theories demonstrating the advantages of expanding trade and lowering tariffs. After World War II, developed economies successfully practiced these principles, resulting in economic growth and trade prosperity.

For decades, trade expansion has brought lower prices and more choices to American consumers. Unfortunately, under President-elect Trump, the United States may be entering a new era of mercantilism. If Trump's recent tariff announcements become policy, trade disruptions will be inevitable. A 25% tariff on all imported goods would trigger inflation, harm economic growth, and disrupt important global alliances.

U.S. Light Vehicle Exports Face Disruption Risks

Recent articles have discussed the potential impact of higher import tariffs on U.S. light vehicle sales and the parts supply chain. If tariffs apply to imports within the USMCA free trade area, the impact could be particularly severe.

However, few articles have explored the potential impact on U.S. vehicle exports. U.S. vehicle exports are crucial to overall production and are part of a two-way trade ecosystem. Given the current state of European vehicle sales and rising global protectionist sentiment, a 25% U.S. tariff would inevitably invite retaliatory measures from major trading partners.

Last year, the United States exported 1 million vehicles to countries other than Canada and Mexico, valued at $42.9 billion (Figure 1). The top six U.S. trading partners absorbed half of these, comparable to purchases by Canada and Mexico. If Europe and other major trading partners impose reciprocal tariffs, a significant number of U.S. jobs would be at risk. Seven states contribute 70% of U.S. global vehicle exports (Figure 2), and factories in these states would face the most severe potential labor disruptions.

A 25% tariff on vehicle imports from Canada and Mexico would be a disaster and would violate the existing USMCA trade agreement. A breach of this magnitude would inevitably invite retaliation and put more U.S. jobs—including those at assembly plants and suppliers—at risk.

Import Disruptions and False Protectionism

Would a 25% tariff on all vehicle imports boost U.S. employment? The short answer: no, quite the opposite. U.S. vehicle prices would rise, and consumers would bear the burden. More importantly, consumers would also face higher prices for domestically produced vehicles, as U.S. factories would use the protection to raise prices beyond levels achievable in a low-tariff environment.

Assuming overall light vehicle prices rise by 20% next year, sales of domestically produced vehicles would decline by 1.5 million units, equivalent to the output of five assembly plants.This comes at a time when manufacturers are increasing U.S. assembly capacity in an environment of overcapacity. Ironically, short-term supply chain disruptions would not be severe, as they cannot change overnight. Parts would simply become more expensive, adding cost pressures.

Regional trade agreements promote trade among all members, with each country exporting products in which it has a competitive advantage. The USMCA agreement does exactly this. Renegotiating the agreement is the right of all participating countries, but destroying it is not a unique U.S. prerogative. Undermining the agreement over non-trade issues is irresponsible. Negotiating on social media limits policy flexibility.

Higher tariffs on Chinese vehicle imports are a different matter. China has 50 million units of production capacity, far exceeding its domestic sales of 25 million units, and its industrial policies aim to destroy Western companies.

High tariffs are intended to counter unfair trade practices, dumping, or national security threats. If the Trump administration wants to address the national security threat posed by China, it should impose tariffs on Chinese vehicles. However, imposing tariffs on products from major trading partners could bring significant unintended consequences, raising costs and stifling U.S. innovation.

About the Author

Warren P. Browne, President of RFQ Insights. Warren Browne is an Adjunct Professor of Economics and Trade at Lawrence Technological University in Southfield, Michigan, and serves as President of RFQ Insights.