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Front Page - Friday, April 27, 2018

Auto industry in crosshairs of China’s retaliatory plans




Journalists examine Volkswagen’s five-passenger SUV concept at the New York Auto Show last month. The vehicle will be designed and engineered for the American market, and Volkswagen will build it in Chattanooga after investing $340 million in the plant there. - AP Photo/Mark Lennihan

When Volkswagen first announced it was going to build a plant in their area, Chattanooga mayor Andy Berke recalls, it was 2008 and people needed jobs. And they got them, 10,000 of them.

“Obviously, those were years where people needed employment during a critical time in our city’s and country’s economy, and they created jobs,” Berke adds. “We want a diverse sector and advanced manufacturing meets the workforce needs for a lot of Chattanoogans.”

Volkswagen still plans on investing $340 million to build a new SUV at its Chattanooga plant despite the company’s statement that President Trump’s proposed steel and aluminum tariffs would make manufacturing in the United States less competitive, threaten job growth and result in higher prices for consumers.

That’s good news for Chattanooga, whose biggest employer is Volkswagen, the U.S.’s only factory for the car manufacturer. It’s also good for the area in general, which has 20,000 people working auto jobs.

But that doesn’t mean Volkswagen officials are happy about it, judging by a statement the company released about the tariffs.

“The Volkswagen Group has made significant long-term investments in the United States that would be impaired by restrictive changes to trade including the proposed steel and aluminum tariffs. As part of a global company with an enthusiastic outlook for operational growth in the United States, it is our hope, in view of the importance of the automotive industry, that the policymakers will maintain free and fair trade. Maintaining the existing trade rules keeps the United States a competitive marketplace for jobs, cost of goods and investments.”

When President Trump proposed tariffs on foreign steel and aluminum, ultimately 25 percent and 10 percent respectively, it caused the price of domestic steel to rise, so even companies like GM that use 90 percent American-made steel are feeling the crunch.

“When Volkswagen sells more cars, we employ more Chattanoogans,” Berke points out. “We know that higher steel prices affect how many people are going to purchase vehicles. I think everybody in Chattanooga certainly wants trade to be fair. We also know that we need reasonable prices so that people can afford to buy the goods.

“So, we want to make sure that our economy continues to expand and that we keep those paths to the middle class like advanced manufacturing in our country.”

President Trump’s steel and aluminum tariffs also propelled China to institute retaliatory tariffs targeting U.S. agricultural exports. The USDA says Tennessee exported $1.5 billion in farm commodities in 2016.

“There are a couple of effects to the steel and aluminum tariffs,” says Tim Meyer, a Vanderbilt law professor who specializes in public international law. “Most immediately, it increases the cost of importing steel aluminum into the United States. If you have, for instance, a company like Nissan or any company that is importing steel, it’s going to raise their costs, because it’s going to require them to pay more for their steel.”

And, of course, that’s its intended purpose, to make steel producers that are located primarily in places like Ohio and Pennsylvania more competitive with steel that is, for the most part, imported from Canada or Europe.

“Automakers in Tennessee, if they import their steel, they’re going to have to pay more for it, because they’re going to have to pay the U.S. government,” Meyer says. “It’s going to end up being more expensive for them. That may cause them to shift and buy some of their steel from U.S. producers, that’s the intended effect of the tariff.

“But, that still will also be more expensive because it’s not subject to the same kinds of price competition that it would be in the absence of a tariff.”

But Meyer says there is economic research that says not all of the burden necessarily gets passed on to the consumer. Still, a loss is a loss no matter who bears it. And for automakers, steel is going to be more expensive no matter where they get it.

“It is certainly the case that some of it, perhaps much of it, will be passed on to the consumer,” he adds. “But in a situation in which you have a lot of businesses that are competing in the marketplace, it might be that what it does is hurt the profitability of the company. So, the companies and the consumer might actually share the loss.”

The American International Automobile Dealers Association also expressed opposition to Trump’s tariffs, which they report could directly counteract any benefits American manufacturers have seen from tax reform. An analysis the AIADA did of tariffs on steel imposed in 2002 found that the Bush steel tariffs cost 200,000 jobs

“These proposed tariffs on steel and aluminum imports couldn’t come at a worse time,” explains Cody Lusk, AIADA president and CEO, in a statement. “Auto sales have flattened in recent months, and manufacturers are not prepared to absorb a sharp increase in the cost to build cars and trucks in America.

“The burden of these tariffs, as always, will be passed on to the American consumer. Car shoppers looking for a deal will instead find that they are paying a new tax to transport themselves and their families.”

Chattanooga has a reputation for having a diverse economy, Berke says. They have the fastest, cheapest, most pervasive internet in the world, a fiberoptic network that goes to every single home and business in a 600-square mile area. That has spawned a large startup world with many technology businesses continuing to grow. In addition, the city has an expanding healthcare industry, and financial services. Unemployment is below the national average.

“When people have money to spend, they build a new house,” Berke adds. “They find a new apartment. They buy a new car. All those things build other sectors. So, we love to see VW growing. At the same time, we need a diverse economy. No city wants to be overly reliant on any one sector or industry. And for Chattanooga’s economy to grow, we have to sell to more people than just live in our city, to export goods domestically and internationally.”

“We want to make sure that there are markets that are out there that’ll buy the things that we make. Again, we know that that means trade has to be fair. At the same time, we have to keep markets open so that our businesses here can sell products elsewhere and employ more Chattanoogans.”