Happy Liberation Day!

Happy Liberation Day! 

Today Trump’s tariffs are to go into effect for Canada and Mexico. When asked if the tariffs would apply to intermediate goods travelling across the borders, Trump said yes. So there will be double, triple, quadruple counting. Trump’s tariffs on Mexico and Canada should – one would hope – be modified before it runs the small auto parts companies out of business. As it now stands, the parts will be assessed with the 25% tariff each time they cross the borders. I am certainly no supply chain expert but the supply chain of automobile parts looks a lot like a Rube Goldberg machine. Consider the manufacturing of pistons and its travels through Canada, Mexico and the US. First, the aluminum is shipped from Michigan to Ontario. The piston is cast and sent back to Michigan and then sent to Mexico to be finished. The piston is sent to Wisconsin to get assembled with rods and rings and sent to an engine plant in Michigan. It is put in an engine and sent to a vehicle assembly plant in Ontario. The vehicle is then shipped to the US as a Canadian export. 

There was a total of six border crossings. If the parts manufacturer has to pay a 25% tariff at each crossing then the price of the automobile will be inflated by those costs as well as the 25% on the finished product. One should note that the companies involved in making the parts are not the big automobile manufacturers. The company making the pistons in the example from the Wall Street Journal is Linamar which would pay a tariff each time the piston goes across a border into the US. One would assume that Linamar would pass the final cost onto the vehicle manufacturer who would then incorporate the cost into the final suggested price of the vehicle.

So first we have the tariffs on steel and aluminum. Then there will a tariff at each part of the supply chain that crosses borders. Then there is a tariff on certain parts such as engines and transmissions. Then a tariff on the assembled vehicle. So it seems to me that the final price of the automobile/truck will be higher than just the 25% imposed on the vehicle.

Of the Big Three, the least biggest loser is Ford, having the least production outside the country with most of its parts and plants in the country. The biggest winner, however, is Tesla which manufactures all of its cars and parts sold in the country manufactured in the US. I wonder why I haven’t seen the conspiracy theorists jumping all over this one, claiming that Trump is putting in his tariffs to help his buddy Elon Musk and Tesla?

Do you feel liberated?