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PARTS IS PARTS?

PARTS IS PARTS?

PARTS IS PARTS?
November 27
09:46 2018

Public Policy Analysis & Opinion

By Kevin P. Hennosy

PARTS IS PARTS?

For good reason, carriers decry trade war’s impact on the automotive sector

Gingerly, a coalition of three insurance carrier trade associations petitioned the U.S. Department of Commerce to spare imported automobile parts from punitive tariffs. In a joint statement delivered in July of this year, the American Insurance Association, the National Association of Mutual Insurance Companies, and the Property Casualty Insurers Association of America said:

While not commenting on the broader strategy of the Administration, on behalf of our member companies and their policyholders, we urge the Department of Commerce to consider this unintended consequence of the imposition of tariffs, quotas or other adjustments on the importation of automotive repair parts.

The Department of Commerce will soon announce findings of an investigation into international trade in steel and aluminum. The White House announced a policy goal of applying a 25% tariff on imported steel and aluminum commodities and products.

The Department of Commerce will soon announce findings of an investigation into international trade in steel and aluminum. The White House announced a policy goal of applying a 25% tariff on imported steel and aluminum commodities and products.

No one is quite sure why the administration landed on the 25% figure. Perhaps it sounded manlier than 24%, and not as arbitrary as 26%? When we start to ponder such questions, it is easy to start down a dark and winding road where madness is not far ahead.

Such a tariff could significantly increase the cost of fulfilling claims against vehicle insurers by increasing the price of replacement parts. Price increases in the supply chain also could lead to lower inventories, which could slow the process of completing claims-related work.

An old topic

In 1987, one of the first work assignments I received at Nationwide Insurance concerned reorganizing the Government Relations office’s topic file on “After Market Parts.” The file contained source documents in support of and opposition to allowing insurers to require auto body repair facilities to use less expensive replacement parts not produced by original manufacturers.

The files left something to be desired when it came to nuance. The “Pro” subfiles contained arguments focusing on overpaid, union-represented labor who made original equipment parts. The “Con” subfiles focused on the construction of non-original equipment parts by mistreated 8-year-olds in Bangladesh. Very informative, indeed!

For the most part, the insurance sector won those debates on the use of non-original equipment parts to make repairs. However, it did not happen in the way we expected in 1987.

This victory came with both changesto law and regulation favorable to theinsurance sector’s arguments, as well as structural changes to the manufact-uring sector. “Original equipment” parts took on a different meaning asautomobile manufacturers’ supply chains became more international. Even the most die-hard “Buy American” consumer will find it difficult to purchase a vehicle with more than 65% of itsparts fabricated in the United States.

The lower-priced imported parts that the insurance sector lobbied to use in 1987 became a material portion of the original equipment parts by the second decade of the 21st century.

Confidence shaken

That shift of manufacturing overseas shook the confidence of American workers, their extended families, and their communities. The United States, and particularly the industrial Midwest, suffered a catastrophic financial loss without the support of an insurance mechanism to provide countercyclical revenue flow.

Having been reared in Ohio in the 1960s and ‘70s, I have memories of both the power of the American automobile sector and its turbulent decline. Those memories embed in my mind the sense of injustice that followed plant closures.

To make matters worse, in the 1970s and 1980s, American wage earners watched state governors panic in their efforts to give away tax and financial incentives to keep or attract auto plants. Often those governors were competing to entice existing manufacturing plants from other states. The United States fought an intrastate trade war that weakened the American economy and gutted state budgets for education, infrastructure, and other public assets.

I understand the emotional response that a material bloc of American voters still feels when it hears the term “globalization” and how they want their government to “punch back.” The policy makers and business leaders could have achieved the transition to global sourcing of parts through smarter processes—but they did not.

Tariffs and trade

Now, students of American historywill remember the tremendous legislative battles in Congress over tariffs that raged in succession from the early 19th century through the New Deal. Again, these battles took place in Congress because the Constitution’s framers rested jurisdiction over tariffs in the legislative branch. The framers feared resting such power in a single person (such as a chief executive), because you just never knew who might find his way to the presidency.

Yet, in 1962, congressional leadersworked with the Kennedy Adminis-tration to pass legislation drafted to foster timely consideration of adjustments to the international framework of tariffs and trade. During previous negotiation rounds, officials tended to ramble on a bit. The administration and Congress wanted to provide an incentive to bring an end to the “Kennedy Round” after no more than five years.

The legislation authorized the administration to enter the trade negotiations and delegated to the president jurisdiction to apply or remove tariffs on commodities essential to the national defense after July 1, 1967. That transfer of power to the president put pressure on negotiators from other countries to cut a deal after a reasonable time for discussion.

The Kennedy Round included negotiations of the General Agreement on Tariffs and Trade (GATT), for the harmonious conduct of international trade that recognized the vital role for democratically elected governments to represent local interests. Without that representation, people lose confidence in government and trade and drift into a fantasyland shaped by anxiety.

Bretton Woods

Sadly, this trade-driven disruption was both foreseen and prepared for in the planning that followed World War II, only to be dismantled. The GATT process arose from the Bretton Woods Agreement, which succeeded in fostering economic growth, democratic government, and wide-ranging improvements to quality of life after World War II.

At the end of the war, the victorious Allies concluded the Bretton Woods Agreement to construct a framework for international trade and finance, which fostered managed capitalism. The agreement created a framework for vigorous trade, which removed some ancient incentives for war by familiarizing foreign peoples and governments. The GATT was part of that framework. The GATT aimed at furthering trade and rationalizing trade barriers where local democratic governments needed to protect domestic sectors through a transition to maintain popular confidence.

Under Bretton Woods, the cycle of European conflict broke, the legitimacy of democratic governments strengthened, and the world economy saw a broad and deep expansion that improved living conditions. The United States experienced exceptional economic growth and improvement of quality of life under the agreement.

Of course, such success does not go unpunished. In the 1970s and ‘80s, radical conservative pressure groups and governments in Europe and North America dismantled the Bretton Woods Agreement. These governments replaced the GATT with the World Trade Organization (WTO), which insulated trade policy from democraticrepresentation. Predictably, the economic, social, and politicalimprovements faded.

Then, as aggrieved citizens petitioned governments for a response, and no response followed, some blocs lost faith in democratic governments. Authoritarian parties and political factions that questioned international trade gained material support in Western democracies for the first time since World War II.

If Bretton Woods still existed as an international framework for trade and finance, nations would still have a rational mechanism for trade negotiations subject to democratic tenets. Politics in North America and Western Europe would not be such a scrum.

Rather than using agreed-upon mechanisms to harmonize trade, these movements advocated swift and terrible retaliation. The concept of waging trade war revived in some political circles. In an unconfident society, some still feel that all America needs is a “strong leader” who will deliver roundhouse punches. To those who hold that perspective, an arbitrary application of a 25% tariff levied on entire commercial sectors sounds like a “trade policy.”

Gun in the drawer

Remember that 1962 law drafted to put pressure on the Kennedy Round of GATT negotiations? Well, it seems to have worked. The Kennedy Round ended with agreement on June 30, 1967—just hours before the president received extraordinary tariff powers.

Those powers remained in place. Only two presidents used the tariff powers in the intervening half-century—in very targeted instances after the Commerce Department took careful aim.

However, the 1962 statute seems like a powerful and unlocked gun that Grandpa left in a drawer in case of an emergency. Then a troublesome grandchild comes to visit and wants to play “Cowboys and Indians” with the neighbors. Oh yes, something terrible can happen.

Carriers’ view

The joint statement of the insurance trade associations clearly expresses that they did not intend to offend the administration over what is a wrongheaded effort to pander to a political bloc that suffers from a long-term abusive relationship with American trade policy.

The statement explains the obviouswhen it discusses the difference between the commodities essential to the national defense and imported automotive parts:

Unlike commodity products such as steel and aluminum that may be subject to the Section 232 tariffs, auto parts are fabricated products that are often engineered to be paired with a specific vehicle and for a specific purpose. Disruptions to the supply chain for these parts are likely to adversely impact consumers who require access to these imported parts to repair their vehicles.

The insurance carriers’ groups warned the Department of Commerce that consumers would not possess the ability to correct the market disrupted by punitive tariffs. The statement continues, cautioning:

These consumers would simply not be able to turn to a domestic source as consumers of commodity steel and aluminum would be. In economic terms, the inability to substitute domestic parts for foreign parts implies that the demand for these parts is highly inelastic. Consequently, virtually the entire “incidence” of any tariff will be borne directly by the consumer.

Furthermore, the threatened tariff would impede insurers’ ability to complete the contractual obligations agreed to with their policyholders. The insurance trade associations point to the likely disruptions to the auto parts supply chain triggered by a tariff.

Again, the trade associations for insurance carriers submitted their observations and suggestions “on little cat feet.” With a rhetorical hat in hand, the trade groups suggested that any tariff exempt auto parts and related materials:

Should the Administration impose restrictions on imports, we urge the Administration to establish a process through which interested domestic parties can petition for product exemptions in a timely and transparent manner.

In a roundabout way, the three trade associations used the joint statement to point out that the administration’s plans target at least three close American allies (Canada, South Korea, and Taiwan), and its fastest-growing trading partner (China).

Furthermore, we recommend that the Administration exempt auto part exports from certain closely-allied markets from the tariffs, particularly those that supply substantial percentages of U.S. auto part imports. Doing so would not only support U.S. industry, but also demonstrate our close ties to those markets.

Will the administration listen to reason?

The author

Kevin P. Hennosy is an insurance writer who specializes in the history and politics of insurance regulation.He began his insurance career in the regulatory compliance office of Nationwide Insurance Cos. and then served as public affairs manager for the National Association of Insurance Commissioners (NAIC). Since leaving the NAIC staff, he has written extensively on insurance regulation and testified before the NAIC as a consumer advocate.

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