The Pending Trade War Will Likely Cause a Recession in the US - Opinion reversed in less than 6 months
The pending trade war will likely send the US economy into recession. The Canadian economy will also obviously suffer but it won't be long before the US will RVS it's decision.
It's actually quite simple how it would happen just looking into one industry alone, let alone the effects on other industries. The Auto Industry in North America will not survive the Tariff's imposed and the US has by far the most to lose from this outcome. It will take less than 6 months for the auto industry to die in North America through reviewing 7 steps.
Step 1) Reliance and Vulnerabilities
The auto industry relies heavily on free trade and products often travel multiple times across the Canadian, Mexican and US border.
To quote Linmar's CEO, a industry expert.
“In my opinion, if a significant tariff is imposed it’ll bring the industry to its knees,” said Linda Hasenfratz, CEO of Linamar.
Car manufacturing primarily uses just in time inventory systems.
Just in time inventory lowers costs by only paying for parts that are needed but also they arrive just when you need them. This is a good thing for costs by lowering inventory and waste but the downside is any disruption to the supply chain brings the process to a hault. This also gives the suppliers of these parts incredible bargaining power in that if a product is not available they can't produce the car so they can easily raise the price to accommodate the tariffs.
Step 2) How important is the auto industry in the USA?
The auto industry in the US has a large amount of economic influence.
Peter Zeihan, Geopolitical specialist, talks about the power of the automotive industry if they were just to strike let alone shut down. The damage to the economy would be described as "immense" and goes on further that this would cause a recession in the USA.
https://youtu.be/yEv4qvvQNl4?si=plwQZYRh94s58Aon&t=88
Currently around 1 million 56 thousand Americans are employed directly in auto manufacturing with 1 million 3 hundred thousand employed in sales and at dealerships. See below link to labour statistics. Only about a third of those employees were unionized (https://uaw.org/about/) and they have members in USA, Canada and Mexico not just the USA making the effect of a complete shutdown much greater than he is suggesting.
https://www.bls.gov/iag/tgs/iagauto.htm
There is also a multiple effect of labour in that jobs that service auto workers is also lost. Often it is quoted as 1.3. Unemployment will increase by about 3 million Americans. It will increase unemployment by around 1% which is a 25% increase from the current rate of 4%.
Step 4) America loses the most
The products coming from Mexico have more US inputs than they export. About 74% of the value add is American not Mexican. The effects to the Canadian economy and mexican economy is exaggerated because all of the value add comes from the USA not Canada or Mexico. So even though it says we export a large amount of automobiles actually most of that value came from the USA. If we import an auto part add it then send it back to the USA the value includes all the original parts from the USA which is estimated at 74%. See source below.
https://www.nber.org/system/files/working_papers/w25868/w25868.pdf
Step 5) Alternatives for Consumers
Of the cars sold in North America, only some manufacture's use North America's supply chain and some only have some models using it.
So for consumers there will be plenty of alternatives to choose from.
See below chart.
https://www.nhtsa.gov/sites/nhtsa.gov/files/2024-06/MY2024-AALA-Alphabetical-6-3-24.pdf
This will mean any increase in prices will shut down the auto industry in that consumers will simply substitute out of North American made cars and pick models or makes made on a different continent.
Step 6) Backlash and Recession
3 million Americans losing their jobs within the next few months will have a much greater effect on the US economy in that the US government is also simultaneously cutting government support for unemployed workers. This means the people unemployed will be hit much harder than in Canada where we are currently not cutting our unemployment programs.
Step 7) Grab your popcorn.
This will backfire on the USA almost guaranteed with just the auto industry alone and the cuts to social benefits. Within 6 months the upheaval occurred will be devastating.