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What do Tariffs Mean for the Auto Industry & Precious Metals?

September 25, 2018201 view(s)
As the trade war with China ramps up we explore how could this impact the American auto industry and, in turn, the overall economic outlook? Also, what could this mean for precious metals used in auto manufacturing? The most significant uses for precious metals in new cars (within the last 30 years) are platinum and palladium in catalytic converters as well as silver and gold throughout electronic circuit boards. Platinum is the most active catalyst and is widely used by many manufacturers for both reduction and oxidation. Palladium is used only as an oxidation catalyst. Once a catalytic converter fails, it can be recycled for scrap; however, the most valuable parts are the precious metals inside the converter, which are almost always extracted. Want a coin made from Palladium? Get Yours here.  Faced with the recent tariffs put into place, China’s retaliatory tariffs have already had a profound effect on the US auto industry; a very negative impact. Industry insiders are saying retaliation by China to tariffs already in place have made United States auto exports uncompetitive. New car prices are beginning to rise, and auto exports are falling. The vehicles made in the U.S. are now subjected to 40 percent tariffs, thus making them less competitive with auto imports from Europe, Japan, and especially vehicles made in China. Now, a Center for Automotive Research (CAR) report warns that auto sales could additionally plunge by nearly 2 million this year alone due to the tit for tat tariff escalation with China. Not only would sales drop off, but as many as 715,000 Americans could lose their jobs in the auto industry alone. The American GDP could also be out as much as $62 billion all because of the domino effect of trade policies. The CAR cites the biggest concern as the threatened use of trade rules known as Section 232 that would declare foreign-made cars and car parts a threat to national security. That could potentially trigger a “downward cycle” in an auto industry already showing signs of decline ten years removed from the Great Recession, said Kristin Dziczek, vice president and senior economist at the Center for Automotive Research, in Ann Arbor, Michigan. Tariffs that have also already been put into place on imported aluminum and steel have added nearly $240 to the cost of producing a new car, truck, or crossover in the United States, according to Peter Nagle, a senior economist with research firm IHS Markit. The first round of tariffs with China is adding more to the price manufacturers have to pay for a variety of parts used on American assembly lines. Recently enacted the third wave of tariffs on China, which has responded with tariffs of their own against US manufacturers and companies, meaning the second and third waves of Chinese tariffs, the effect of which has yet to be felt by American manufacturers. Nagle continued to warn that enacting tariffs using Section 232 rules would be devastating on the American economy and a “dizzying” series of trade moves will “exacerbate” the problems facing the auto industry as it struggles to head off the first downturn in sales since emerging from the great recession of 2008. He also estimates consumers will be, “looking at price increases of $1,300 for a typical mass market product, and up to $5,800 for a luxury vehicle.” These increases also would not just be limited to imported vehicles.  Toyota is predicting that the price of a US made Camry will increase by about $1,600. In addition to the CAR study, IHS is forecasting new vehicle sales in the US to drop by around 2 million vehicles annually. Pairing the impact of these tariffs alongside the possible dissolution of the North American Free Trade Agreement and the effects on American consumers and manufacturers could be absolutely devastating. Industry experts warn that trade moves threaten to fracture automakers’ continent-wide network of parts and vehicle assembly operations. Disrupting the system put into place by NAFTA would ultimately mean more than just higher costs to produce vehicles. Many midsize to smaller auto parts suppliers could be forced out of business, disrupting assembly plants’ productivity and ultimately result in a big hit to automakers’ profits. Auto experts also note China as a key supplier to the automotive aftermarket. Parts such as tires, wheels, filters, and wiper blades are major imports to US consumers, which could result in increases in the cost of maintenance and repair of vehicles. With tariff-related costs on the rise and auto sales already on the decline, manufacturers are being forced to pass on their cost increases to sticker prices on new vehicles. And as consumers are already struggling with car payments, (the cost of a typical vehicle sold in the US approaches $35,000) and with car loans already being stretched out to record levels, as financing of 60- 84 month loan agreements are becoming more the norm- many Americans may not be able to afford the additional financial strain a new vehicle purchase would bring. Ford has reacted already by announcing plans to cut production of its Mustang and other vehicles shipped to China-based off China’s 40 percent tax on American made vehicles. Dozens of businesses including Daimler AG, Hyundai Motor Co., and General Motors Co. have said they already see or anticipate higher prices driving up manufacturing costs or reducing earnings. John Bozzella, CEO of the Association of Global Automakers has said, “Retaliation by China to tariffs already in place has made US auto exports uncompetitive and will eliminate our bilateral auto trade surplus.” Bozella also says he is, “concerned that escalating trade tensions will not produce the desired results.” In fact, this trade war is likely to have a vast effect on the American economy. As the auto industry faces a dip in sales unseen since 2008, many jobs could also be negatively affected.   The CAR study estimates as many as 117,000 employees at the country’s 17,000 new car dealerships could lose their jobs. As Beijing has strengthened its regulations on heavy-duty diesel vehicle emissions, perhaps the price of catalytic converters, many of which are produced in the United States, could affect the market price of the precious metals used to produce them. And these products are also not only used to control emissions in cars but also on electrical generators, forklifts, mining equipment, trucks, buses, locomotives, and motorcycles. A bleak outlook for America’s auto industry could mean big trouble for the national economy and in turn the strength of the US dollar. Major economic indicators for investing in the automotive sector are auto sales, (already on the decline) employment rate, (117,000 jobs in new car dealerships may be in jeopardy) consumer confidence and interest rates (raised recently by the Fed for the first time since 2008) with auto sales being the most important indicator for the automotive sector. With sales estimated to drop 2 million annually as the CAR study suggests, consumer confidence and in turn, the economy could face a severe and devastating drop-off.
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