Proposals for a border tax to pay for a wall with Mexico and encourage increased manufacturing in the U.S. would add hundreds to thousands of dollars to the cost of every car and truck sold here, including those assembled in American factories.
There’s even a risk the tax could raise prices and reduce sales so much that the U.S. loses manufacturing jobs, according to the Motor Equipment Manufacturers Association, the umbrella group for several supplier associations representing 1,000 companies.
Analysts, associations and experts say the tax could add $2,000 to $2,500 to the average cost of a vehicle sold in the U.S.
“This is a price increase, and the consumer will bear an awful lot of the burden,” Michigan State University professor of economics Charles Ballard said. “There are things you can do with a scalpel that might create jobs, but if you use a meat ax, you’re likely to do harm. I’m afraid in one or two years we’ll wake up to the recognition that this policy had many unintended consequences.”
The supply chain for parts and vehicles made in the U.S., Canada and Mexico is among the most closely integrated in the world. Some raw materials components cross borders many times in the manufacturing process, potentially being taxed repeatedly before a finished vehicle ships to the dealership, said David Andrea, vice president for research at the Center for Automotive Research.
For instance, a piece of steel might be taxed when it enters the U.S. to be made into a screw. The screw would be shipped to Mexico to fasten the box for electronic controls. That box then comes to Michigan to be attached to a V8 engine. Then the engine goes to Mexico where it’s installed in a pickup that is shipped to a dealership in Atlanta. The result: a single part that has been taxed multiple times, with each time increasing the cost of an engine made in Detroit and a vehicle sold in Georgia.
Parts plants in the U.S. also make many components for vehicles built in Mexico. A study by the Center for Automotive Research found that 40.3% of the content of vehicles built in Mexico in 2015 came from the U.S. CAR said U.S.-built vehicles average 11.7% Mexican content. Tens of thousands of American manufacturing jobs depend on parts used in Mexican plants, according to the CAR report.
“Affordability of new cars is already a concern,” Autotrader senior analyst Michelle Krebs said. “The cost of goods and services, including new and used vehicles, have far outpaced incomes, which have been flat. Prices of new cars have risen 35%, used cars 25% and the consumer price index nearly 60% since 1997, while wages have stagnated or slipped. In 1990, average income was about $53,000; now it’s about $54,000.”
The average cost of a new vehicle hit a record high near $35,000 early in 2017.
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