Last week’s announcement that the White House is investigating national security risks imposed by imported vehicles sent shock waves across the global automotive industry and had suppliers scrambling to consider the potential ramifications.
As was the case with the recent steel and aluminum tariffs, President Trump, citing Section 232 of the Trade Expansion Act of 1962, directed the Commerce Department to investigate whether the import of automobiles is a threat to national security, and, if so, to make recommendations to mitigate risk. Although the specifics of any resulting tariff are still unknown, there is speculation that a 25 percent tariff may be imposed on the roughly 8.7 million cars and related parts and subsystems that are imported into the United States annually.
Although a Section 232 investigation typically takes time, any business directly or indirectly involved with the automotive industry needs to begin considering its potential impacts now.
These potential tariffs raise a myriad of questions as to application. Consider foreign OEMs with significant plants in the U.S. Although final assembly is domestic, many supply chain components are imported from overseas and could be subject to tariffs. How will this impact the supply chain? How will it impact the consumers who purchase these vehicles? What about aftermarket parts for repairs?
For suppliers it starts with the contract. On March 2, I wrote this blog on steel tariffs that began with a thorough contract review, especially provisions related to pricing and purchasing practices, delivery terms, force majeure and hardship clauses as key points to review. For contracts currently in negotiation, the potential introduction of these and future tariffs is an opportunity to properly allocate responsibility through clearly articulated provisions.
Even if your current contracts are unclear relative to tariffs, there still may be room to maneuver if the steel and aluminum tariff example holds true. For these tariffs, it now appears the sweeping tariffs were, perhaps, intended to create leverage for revisiting existing trade deals. Since the announcement, some countries have been granted exclusions, others have negotiated new trade deals—and yet others are still in negotiations.
Moreover, a process was developed whereby individual businesses can request exclusions on a part-by-part basis. So far, there are reports that thousands of exclusion requests have been filed, but only a few hundred have reached the public comment stage. The slow process has even led Congress to raise concerns about the exclusion process currently in place. The potential new auto tariffs raise the question of whether these tariffs will also lead to countries negotiating exclusions, or if a system will be put in place for companies to request exclusions.
Although much remains uncertain, it’s clear the current administration is making increasing use of tariffs and, based on the example of the steel and aluminum tariffs, these can be fast moving conversations. It’s time for your business to prepare for the impact. As customers up and down the supplier chain start to scramble, understanding your road map to negotiations by understanding your contracts is essential. Warner attorneys have been monitoring these developments and their potential impacts closely, and are ready to assist you in navigating a path to lessen the unavoidable impact these tariffs could have on your business.