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Trade war

Trump auto tariff threat draws criticism from Japan and China

Automaker stocks hit by reports of potential 25% levy

Mitsubishi cars wait to be exported to the U.S. market at a port in Aichi Prefecture in central Japan. (Photo by Takuya Imai)

WASHINGTON/TOKYO -- The administration of U.S. President Donald Trump is considering new tariffs on imported vehicles based on a national security law, drawing immediate criticism from major auto-exporting countries.

The tariff could be increased to 25% from the current 2.5% after investigations related to a legal provision known as Section 232, according to U.S. media.

Japan's chief cabinet secretary, Yoshihide Suga, told reporters in Tokyo on Thursday that "any trade measures should be consistent with World Trade Organization agreements," and said he would carefully monitor the situation.

Trade Minister Hiroshige Seko stressed that such a move would "plunge the global market into turmoil" and echoed the importance of abiding by WTO rules.

Meanwhile, Chinese Ministry of Commerce spokesman Gao Feng told a regular news conference in Beijing the same day that "China opposes the abuse of national security clauses, which will seriously damage multilateral trade systems and disrupt normal international trade order."

Gao's briefing focused largely on whether China is making progress in its trade dispute with the U.S. "We will closely monitor the situation under the U.S. probe and fully evaluate the possible impact, and resolutely defend our own legitimate interests," he said.

On Wednesday, Trump instructed the U.S. Commerce Department to investigate the impact of vehicle and auto parts imports on national security. "There is evidence suggesting that, for decades, imports from abroad have eroded our domestic auto industry," said Commerce Secretary Wilbur Ross.

"The Department of Commerce will conduct a thorough, fair, and transparent investigation into whether such imports are weakening our internal economy and may impair national security," Ross added.

Trump tweeted: "There will be big news coming soon for our great American Autoworkers. After many decades of losing your jobs to other countries, you have waited long enough!"

Shares of Japanese carmakers fell on Thursday on concerns that higher tariffs would hit U.S. sales. Toyota Motor's stock price was down 3%, while Mazda Motor, which has the highest export ratio of any Japanese automaker, saw shares fall by 5.2%. South Korean manufacturer Hyundai Motor's stock price fell more than 3%.

Takeshi Miyao, an analyst at Tokyo-based auto market researcher Carnorama, said the new tariffs would "hit Mazda Motor especially, and automakers that do not have manufacturing bases in the U.S." Other companies will be forced to adjust the proportions of manufacturing between their home countries and the U.S., possibly forcing them to invest in greater capacity in the U.S. "A downward revision [in earnings] might be required for this term," Miyao said.

According to Reuters, Masamichi Kogai, Mazda Motor's president, said on Thursday that the company would continue its policy of "production and sales matching the rules of each country." The Japanese carmaker is building a factory with Toyota Motor in the U.S., which is expected to start operations in 2021. Kogai said he is not making changes to planned capacities or car models for the new factory.

While the new tariff may boost employment in auto-related industries, the overall impact of such a move "would be negative for the U.S. economy," said Akihiko Yasui, head of research for Europe and the Americas at Mizuho Research Institute in Tokyo. Furthermore, "other countries could impose counter trade measures against the U.S. for other products," he said, putting pressure on the U.S. economy.

Yasuhide Yajima, chief economist at NLI Research Institute, stresses the need to keep a cool head over the Trump administration's actions. "Governments should react to U.S. trade issues from a broad perspective ... and thus find a realistic point of compromise," Yajima said.

Tariffs based on national-security concerns usually take months to apply. The government must conduct detailed research to prove that certain imports threaten to impair the country's security. Typically, if the flood of imports weakens an industry, it could be argued that the lack of domestic producers would impede U.S. defense procurement.

Trump has previously used Section 232 of the Trade Expansion Act of 1962 to raise tariffs on steel and aluminum imports. In April 2017, the U.S. Department of Commerce, under the direction of the president, launched a study to consider new tariffs on imported steel and aluminum. The investigation concluded in January 2018, and tariffs of 25% and 10% were imposed this March.

The Wall Street Journal quoted an official as saying that the investigation into potential new measures for the auto industry is expected to last longer than the administration's 10-month study regarding aluminum and steel.

The Washington Post reported that the move was designed to put pressure on Mexico during the final stages of negotiations for a new North American Free Trade Agreement.

According to the Center for Automotive Research, imported cars accounted for 44% of the automobiles sold in the U.S. Imports from Japan, Canada and Mexico each held an 11% share, followed by Germany and South Korea.

Japanese automakers send roughly 40% of their exports to the U.S. market. Tariff hikes would hurt the competitiveness of imported cars and could spur a realignment of suppliers.

Trump reportedly notified auto industry leaders at the White House on May 11. In attendance were the heads of U.S. automakers such as General Motors, as well as leaders from global manufacturers Toyota Motor, Honda Motor and Volkswagen.

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