WASHINGTON—If a key aim of the Trump import tariffs is to make America the global hot spot for auto innovation, industry leaders say the administration is going about it in a strange way.
In a hearing on the tariffs last week, industry representatives argued that walling off the U.S. will turn America into a slacker, not a pacesetter, when it comes to such disruptive marvels as autonomous vehicles.
Yet U.S. Commerce Secretary Wilbur Ross hinted that innovation will be the rationale behind the national security argument the department is making to push through duties of up to 25 percent on imported cars and parts.
"The industry is central to the advancement of new technologies such as autonomous vehicles, fuel cells, electronic motors, battery storage, composites and other new materials and advanced manufacturing processes," said Ross, founder of supplier International Automotive Components Group.
He said his department's review of the viability of the domestic auto industry—expected to be completed this summer—will consider emerging auto technologies that are important for the wider economy.
Ross said it was "too early" to say if the Trump administration would impose the tariffs, even as many auto makers and members of Congress think it is a foregone conclusion. Some political observers privately say they expect to see a connection made between military strength and harnessing new technologies from the auto sector.
But industry officials argued strenuously that protectionist policies will chase away research and development dollars, diminishing the U.S. as a hub of innovation.
Bozzella: Capital spending at risk
John Bozzella, CEO of the Association of Global Automakers, a trade association for several foreign auto companies doing business in the U.S., said America is a leader in electric vehicles, hybrids, automation, active safety systems and autonomous vehicles, but he added: "I'm extremely concerned that tariff walls will send that innovation elsewhere."
Critics said tariffs will make vehicles more expensive, drive down demand, force companies to absorb some of the extra cost and lead to employee layoffs.
"You have to find that loss of revenue from somewhere," Bozzella said. "It could be R&D or plant investment. Even if you make the assumption that not all of this gets passed on to the consumer, at some point, the money has to come from somewhere, and it could impact capital expenses."
Adam Posen, president of the Peterson Institute for International Economics, said the Trump administration's anti-globalization approach to trade has had a chilling effect on foreign direct investment as companies question whether the U.S. is a stable business environment.
He said investment by international companies in U.S. operations has declined sharply as the White House challenges the rules-based global trading system, expands the definition of national security for reviews of pending foreign investments and exits multilateral free-trade agreements. In the first quarter, foreign investment was $51 billion, compared with $90 billion in the same period a year ago and $147 billion in 2016.
"That's particularly striking," Posen said, "in an environment where the tax code was changed to incentivize inward investment in the U.S., where the profitability of investment has gone up because of the tax code change, where growth has been strong and where countries like China know they will have less access if [legislation making it easier to block foreign investments for security reasons] goes through."
Effect on R&D
Posen said that if the U.S. invokes auto tariffs and blows up the North American Free Trade Agreement, which allows duty-free shipments across borders for products that meet regional content requirements, auto makers and suppliers will invest in other regions. Also, protectionism will shrink the talent pool needed to push innovation.
"The U.S. has been the best place to do R&D," he said, because of its respect for intellectual property rights, the legal system and immigration policies that allowed the hiring of good researchers and engineers. "But if you make the U.S. less attractive and welcoming, the global pool of r&d goes down."
A major reason companies innovate is to grow export markets, which could be restricted if countries retaliate with their own tariffs, said Vanessa Sciarra, vice president of trade and investment policy at the National Foreign Trade Council, in an interview.
She added: "When you tell the industry, it's better for you to contract, which is essentially what you are saying with tariffs, and become more domestically focused, it will have a dampening effect on innovation. And it might incentivize some companies to move their innovation hubs offshore."