Comments Regarding “Section 232 Automobile Parts Imports Investigation”

By SBE Council at 2 July, 2018, 1:55 pm

The Honorable Wilbur Ross

Secretary of Commerce

U.S. Department of Commerce

1401 Constitution Avenue, N.W.

Washington, D.C.  20230

Subject: Section 232 Automobile and Automotive Parts Imports Investigation, docket number DOC-2018-0002

Dear Secretary Ross,

The Small Business & Entrepreneurship Council (SBE Council) appreciates the opportunity to comment on the investigation into the effects of national security of automobiles and automotive parts under Section 232 of the Trade Expansion Act of 1962. To sum up, imposing tariffs on automobiles and automobile parts is, in effect, raising taxes on U.S. businesses – including small businesses – and American consumers, and such tax increases will generate as assortment of economic negatives.

As we have seen with the positive changes in policy direction brought about by the Trump administration, tax and regulatory relief make a real difference in terms of incentivizing and expanding resources available for private sector investment. Consider the points I raised in a recent article penned for TheHill.com regarding the tax relief measure signed into law in late 2017:

In fact, especially when combined with assorted deregulation efforts, incentives for investing clearly have been enhanced, and the effects can be seen in some key numbers.

From the first quarter of 2017 to the first quarter of 2018, according to U.S. Bureau of Economic Analysis data, growth in real nonresidential — or business — investment took a significant step up from what the U.S. economy had been experiencing over the previous four years, and really since the onset of the Great Recession.

In fact, the growth in business investment over the past five quarters has run ahead of the post-World War II average and the average since the end of this past recession. 

Consider that growth in real nonresidential investment averaged a robust 6.9 percent from the first quarter of 2017 through the first quarter of this year (our latest data). That runs well ahead of the 4.6 percent post-war average and the 4.4 percent averaged since the Great Recession ended. It’s more than double the 3 percent average growth rate that prevailed from 2013 to 2016.

Looking at each major area within business investment, the step up in growth remains unmistakable. Structures investment saw an average real growth rate of 7.1 percent over the past five quarters versus a mere 2.6 percent over 2013 to 2016.

Meanwhile, real growth in equipment investment came in at 8.2 percent since the first quarter of 2017 compared to only 2.8 percent over the previous four years. And the real rate of growth in intellectual property investment moved from 3.9 percent from 2013 to 2016 to 5.3 percent over the last five quarters. 

Increased investment is good news now and for the future. Current GDP growth is boosted, and future economic growth will benefit from the innovations, efficiencies, business expansion and enhanced labor productivity that investment drives. For good measure, in turn, worker earnings benefit from improved productivity.

Unfortunately, such major accomplishment are threatened to be diminished or offset by assorted tariff measures that would raise costs for a wide array of small businesses – from the retail sector to manufacturing – their workers and consumers, and due to retaliatory measures by our trading partners, lost business and reduced opportunities in the international market for U.S. enterprises and workers. That surely will be the case with additional tariffs on automobile imports, in addition to other measures currently being pursued, i.e., Section 232 Steel and Aluminum tariffs and the Section 301 tariffs against Chinese imports.

When considering increased tariffs and retaliation by trading partners, it is critical to keep the following points in mind:

● First, with all due respect, any justification for imposing automobile and automotive parts tariffs (or steel and aluminum tariffs, for that matter) based on national security concerns is without merit on a prima facie basis. Of course, the reality is that U.S. businesses and individuals are not trading with our nation’s enemies, nor does U.S. auto production have anything to do with any possible requirements tied to wartime needs for military vehicles and equipment.

● Second, it is important to keep in mind that governments do not trade; rather, individuals and businesses do. There’s no difference between trading across town, across the nation or around the globe. Trade occurs between individuals, between businesses, and between individuals and businesses. And parties would not trade – that is, would not buy and sell products – if they were not made better off by such voluntary transactions. Therefore, trade, by definition, makes people better off.

● Third, raising the costs of trade broadly spells trouble for the U.S. economy. Contrary to the claim that the U.S. is a fairly closed economy and that trade does not play a significant role, the truth, as the data make clear, is that international trade is deeply integrated in and vital to the U.S. economy. Consider, for example, that real total trade (exports plus imports) in 1955 equaled 6.1 percent of real U.S. GDP. That grew to 29.3 percent in 2017. U.S. exports as a share of the economy jumped from 2.7 percent of GDP to 12.8 percent over this period, and imports from 3.4 percent of GDP to 16.5 percent. For good measure, growth in trade equals or accounts for a significant portion of U.S. economic growth, at least 40 percent in recent times.

● Fourth, undermining trade by raising costs via tariffs and quotas, for example, means undermining small businesses. The overwhelming majority of businesses involved in international trade are small firms (2015 latest Census Bureau data), with 76.2 percent of U.S. exporters having fewer than 20 employees, and 86.7 percent fewer than 50 workers. Similarly, among importers, 75.2 percent have fewer than 20 workers, and 85.5 percent fewer than 50 workers.

● Fifth, U.S. tariffs are destined to raise costs and undermine the competitiveness of U.S. businesses given that more than 55 percent of all U.S. goods imports in 2017 were inputs for U.S. businesses, that is, they were intermediate goods or capital goods. Therefore, increasing tariffs or establishing quotas on imports is in effect imposing a tax increase on a wide array of U.S. small businesses, such as manufacturers. In turn, among U.S. manufacturing employer firms, 74.6 percent have less than 20 employees, 93.5 percent less than 100 workers, and 98.5 percent less than 550 employees. It also follows that workers and consumers suffer accordingly.

● Sixth, if we focus on auto and auto parts tariffs, consider that among motor vehicle parts manufacturing employer firms, 59.6 percent have fewer than 20 employees, 79.8 percent fewer than 100 employees, and 91.6 percent fewer than 500 workers. These firms face higher costs in the cases of steel and aluminum, Chinese, and auto tariffs.

● Seventh, increased costs and prices will hurt automobile, auto parts, and related sales, with negatives again felt by small businesses in various sectors. For example, among employer firms in the automobile and other motor vehicle merchant wholesalers sector, 78.3 percent have fewer than 20 employees, 92.7 percent fewer than 100 workers, and 97.7 percent fewer than 500 employees. And among U.S. auto dealers, 68.6 percent have fewer than 20 workers, 92.9 percent fewer than 100 employees, and 99.5 percent fewer than 500 workers. Also, as for automotive parts, accessories, and tire stores, 92.7 percent have fewer than 20 employees, 98.7 percent fewer than 100 employees, and 99.7 percent fewer than 500 workers. Another sector facing higher costs would be auto repair and maintenance businesses, with 95.7 percent having fewer than 20 workers, 99.3 percent fewer than 100 workers, and 99.8 percent fewer than 500 employees.

The ills of government-imposed barriers to trade, such as tariffs and quotas, have been long understood and agreed upon among economists – indeed, basically since Adam Smith’s landmark book An Inquiry into the Nature and Causes of the Wealth of Nations was published in 1776. The Small Business & Entrepreneurship Council strongly urges the Trump administration to refrain from imposing automobile and automotive parts imports, as these would be detrimental to U.S. small businesses, workers, consumers and our nation’s economic growth.

Higher tariffs are an economically destructive measure working against productive policy measures, such as tax and regulatory relief.  U.S. policymakers need to reclaim the leadership role that the U.S. has long held in terms of advancing freer trade, and work to reduce barriers to trade by entering into and expanding free trade agreements.

Sincerely,

Raymond J. Keating, Chief Economist

Small Business & Entrepreneurship Council