Threatened tariffs threaten dealers

Impact on future dealer investment

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Dealers are justifiably concerned with possible tariffs on imported vehicles and vehicle parts. Although efforts are underway to push back on the 20 or 25 percent import tariffs threatened by President Trump, the rulemaking process is proceeding rapidly, and there is no predicting what the President will ultimately do.

In May, the President directed the U.S. Commerce Department to launch an investigation into whether imported vehicles pose a national security threat under Section 232 of the Trade Expansion Act of 1962. The Commerce Department has until February to wrap up the probe and make recommendations to the President, but comments from Wilbur Ross, Secretary of Commerce, suggest that the recommendations may come as soon as August. Below is a brief timeline of action taken to date on the investigation:

  • When the investigation was launched in May, Ross said "there is evidence suggesting that, for decades, imports from abroad have eroded our domestic auto industry."
  • Comments on the investigation from interested parties were due, and submitted, on June 29. For example, NADA filed written comments arguing that although some adjustments to promote fair trade should be considered, blanket tariffs would harm the industry, including many U.S. workers and consumers
  • In early July, the Commerce Department asked car makers to complete 34-page questionnaires from the department’s Bureau of Industry and Security seeking sensitive details about company finances, factories, supply chains and other topics. The information sought was described as massive and invasive according to a statement released by the Alliance of Automobile Manufacturers.
  • The Commerce Department’s original plan was to conduct two days of hearings on July 19-20, but now it appears only one day of hearings will be held on July 19.
  • Over 200 trade associations and companies are seeking to support a bill introduced in the Senate to require congressional approval before proposed tariffs in the interest of national security could be implemented.
  • NADA has ramped up meetings with members of Congress and has launched a study on the economic impact that tariffs would have on dealerships and sales.

Substantively, reaction to the possibility of tariffs by dealer groups, especially import dealer groups, has been strong: "This would be a real punch in the gut for the auto sector, employees and consumers," Cody Lusk, CEO of the American International Automobile Dealers Association, told Automotive News. Auto import tariffs would be devastating to the auto industry and could jeopardize the 9,600 import-brand dealerships the association represents and the 577,000 employees at those stores, Lusk said.

"The president is rightfully concerned about trade imbalances and manufacturing jobs in the United States," NADA CEO Peter Welch said in a statement to Automotive News. "But automobile production today is so deeply integrated across international boundaries that virtually all cars and trucks, domestic and international, have foreign components even if they are assembled in the United States. "And a tariff, depending on how it is implemented, could raise prices dramatically for customers and threaten auto industry jobs at home," he said. "We look forward to working with the administration to find solutions that don't dramatically increase prices or limit choices for our customers."

If the tariffs are imposed, a significant drop in new-car sales is expected, since consumers, not companies or countries, would be the parties paying the tariffs in the form of higher prices. Although the tariffs are not yet in place, and efforts are underway to stop them, even today the chance of significantly lower sales impacts the strategic planning of every dealer, especially import dealers.

Moreover, dealers have questioned whether the prospect of substantially lowered sales due to tariffs has any bearing on their responsibilities to make major capital investments, such as in new or remodeled facilities, under the requirements of their dealer sales and service agreements, or incentive “margin” programs. Could such investments be deferred or modified pending determination of future post-tariff volume and profitability? A number of legal avenues may support some measure of relief or adjustment, including, for example, arguments related to “force majeure” (the legal theory that excuses contractual performance during the pendency of an event that interferes with that performance and is outside the party’s control); the covenant of good faith and fair dealing implied into every contract that mandates each contracting party to use good faith in its performance and enforcement of contractual obligations; and statutory provisions that impose various degrees of reasonableness and fairness in the imposition of facilities and other requirements upon individual dealers. Dealers, especially import dealers, who find these questions pertinent and timely to their own businesses should consult with legal counsel to determine their legal rights and how best to assert them in a reasonable manner during these uncertain times.