This Isn’t Good News for Consumers

Stocks were down once again yesterday, after fear of more tariffs shook the markets.

Last Friday, the European Union (EU) imposed tariffs on €2.8 billion worth of US goods. These were in response to the US applying tariffs on steel and aluminum imports from the EU. The EU duties apply to iconic US products such as jeans, bourbon and motorcycles.

As we have told you before, tariffs don’t work. All they do is decrease competition and make things more expensive…

…And in a trade spat, things can escalate quickly.

Tariffs on European car imports

Trump responded by saying the US will be imposing 20% tariffs on European car imports if the EU doesn’t remove these tariffs.

Yet Europe didn’t back down.

In fact, if the US imposes more tariffs, the EU has threatened to retaliate.

This also comes at the time when the US has already imposed US$50 billion in Chinese goods, and is threatening to impose duties on US$200 billion extra of Chinese goods.

That’s why China and the EU could be teaming up together against US tariffs. As Business Insider recently reported:

The European Union and China are teaming up to rewrite global trade rules, their latest move as part of the trade conflict President Donald Trump has launched as part of his “America First” agenda…

‘The pushback took the form of Brussels and Beijing agreeing to form a group inside the World Trade Organisation dedicated to rewriting the global rules on subsidies and tech policy in the light of Trump’s actions.

As you can see in the graph below, the US balance of trade deficit with the EU has been increasing in the last years. In 2017, Germany had the largest trade surplus against the US, €66 billion.

import-270618

Source: Eurostat
[Click to enlarge]

And much of that deficit comes from vehicles…

As you can see below from Eurostat, EU car exports to the US are almost six times higher than EU imports from the US.

traded goods-270618

Source: Eurostat
[Click to enlarge]

European vehicles and auto parts are one of the big-ticket items.

Car tariffs aren’t great news for American consumers.

Average monthly auto loan payments have reached a record high

Research from Experian, a consumer credit reporting agency, shows consumers are paying more on average for auto loans. Average monthly auto loan payments have reached a record high of US$523. This is up 13% from the US$460 monthly average back in 2013.

Average loan amounts for new cars have also increased. In the first quarter of this year, new car loan amounts hit an average of $31,455, a US$921 bump — or 3% — from last year.

This is because car prices have been edging higher in recent years. According to Kelley Blue Book, new car prices have increased on average about 10% in the last five years.

So, lenders are offering longer loan pay terms to increase affordability.

According to Experian, ‘loan terms for new vehicles have also increased during the quarter (slightly above 69 months). While 72-month loans remain the most common loan term, more new loans have spilled into the 85- to 96-month bucket.

The longer the period the less you pay monthly, but the more interest you pay for your car.

Yet, in the US’ case, consumers are extending loan periods and paying more on their monthly payments.

Car prices and auto loan amounts have been increasing. And so have credit card and auto loans delinquencies, as you can see in the graph below.

loan type-270618

Source New York Fed
[Click to enlarge]

Car prices —and delinquencies — could go even higher if tariffs go into place.

As Reuters recently reported:

The Alliance of Automobile Manufacturers, a group representing General Motors Co, Toyota Motor Corp, Volkswagen AG (VOWG_p.DE) and other major automakers, will file written comments warning that a 25 percent on imported passenger vehicles would cost American consumers $45 billion annually, or $5,800 per vehicle, spokeswoman Gloria Bergquist said.

“Nationwide, this tariff would hit American consumers with a tax of nearly $45 billion, based on 2017 auto sales. This would largely cancel out the benefits of the tax cuts,” Bergquist said, previewing the comments. Consumers would also face higher costs of imported auto parts when buying vehicles from both U.S. and foreign automakers, she said.

And, it wouldn’t take long for consumers to feel the effect. As Americas Operation and Global Vehicle Forecasting president for LMC Automotive told CNBC:

There isn’t more than about 60 days of inventory at dealerships so it wouldn’t take more than a month or two to affect consumers.

Wage growth has barely grown when adjusted for inflation…even at unemployment lows.

Higher loans and no wage growth are taking a toll on the US savings rate, which has been dipping in recent years. And this is happening at the same time that the US Federal Reserve is increasing interest rates.

If tariffs go into place, it will put more pressure on US households.

Best,

Selva Freigedo,
Editor, Markets & Money


Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.


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