Notice2021-24162
Publication of a Report on the Effect of Imports of Automobiles and Automobile Parts on the National Security: An Investigation Conducted Under Section 232 of the Trade Expansion Act of 1962, as Amended
Primary source
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Published
November 8, 2021
Issuing agencies
Commerce Department
Abstract
The Department of Commerce in this notice is publishing the Report on the Effect of Imports of Automobiles and Automobile Parts on the National Security. The report documents the findings of the Department of Commerce's investigation to determine the effects on the national security of imports of automobiles, including cars, SUVs, vans and light trucks, and automotive parts. This investigation was carried out under Section 232 of the Trade Expansion Act of 1962, as amended. All classified and business confidential information in the report was redacted before the release. This report was completed on February 17, 2019 and posted on the Bureau of Industry and Security (BIS) website on July 6, 2021. The Department of Commerce has not published the appendices to the report in this notification of report findings, but they are available online at the BIS website, along with the rest of the report (see the ADDRESSES section).
Full Text
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[Federal Register Volume 86, Number 213 (Monday, November 8, 2021)]
[Notices]
[Pages 62028-62079]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-24162]
[[Page 62027]]
Vol. 86
Monday,
No. 213
November 8, 2021
Part III
Department of Commerce
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Publication of a Report on the Effect of Imports of Automobiles and
Automobile Parts on the National Security: An Investigation Conducted
Under Section 232 of the Trade Expansion Act of 1962, as Amended;
Notice
Federal Register / Vol. 86, No. 213 / Monday, November 8, 2021 /
Notices
[[Page 62028]]
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DEPARTMENT OF COMMERCE
Publication of a Report on the Effect of Imports of Automobiles
and Automobile Parts on the National Security: An Investigation
Conducted Under Section 232 of the Trade Expansion Act of 1962, as
Amended
AGENCY: Department of Commerce.
ACTION: Publication of a report.
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SUMMARY: The Department of Commerce in this notice is publishing the
Report on the Effect of Imports of Automobiles and Automobile Parts on
the National Security. The report documents the findings of the
Department of Commerce's investigation to determine the effects on the
national security of imports of automobiles, including cars, SUVs, vans
and light trucks, and automotive parts. This investigation was carried
out under Section 232 of the Trade Expansion Act of 1962, as amended.
All classified and business confidential information in the report was
redacted before the release. This report was completed on February 17,
2019 and posted on the Bureau of Industry and Security (BIS) website on
July 6, 2021. The Department of Commerce has not published the
appendices to the report in this notification of report findings, but
they are available online at the BIS website, along with the rest of
the report (see the ADDRESSES section).
DATES: The report was completed on February 17, 2019. The report was
posted on the BIS website on July 6, 2021.
ADDRESSES: The full report, including the appendices to the report, are
available online at <a href="https://www.bis.doc.gov/index.php/other-areas/office-of-technology-evaluation-ote/section-232-investigations">https://www.bis.doc.gov/index.php/other-areas/office-of-technology-evaluation-ote/section-232-investigations</a>.
FOR FURTHER INFORMATION CONTACT: Brittany Caplin, Office of Public
Affairs, U.S. Department of Commerce at (202) 482-4883. For more
information about the section 232 program, including the regulations
and the text of previous investigations, see <a href="http://www.bis.doc.gov/232">www.bis.doc.gov/232</a>.
SUPPLEMENTARY INFORMATION:
The Effect of Imports of Automobiles and Automobile Parts on the
National Security
An Investigation Conducted Under Section 232 of the Trade Expansion Act
of 1962, as Amended
U.S. Department of Commerce
February 17, 2019
Table of Contents
I. Executive Summary
Findings
1. A Healthy U.S. Automobile and Automobile Parts Manufacturing
Industry Is Necessary for U.S. Defense and National Security
2. Imports of Automobiles and Automobile Parts Are Impairing the
Ability of the Domestic Industry To Meet National Defense
Requirements
3. Decline in U.S. R&D for Important Automotive Technologies
Threatens To Impair U.S. National Security
Conclusion and Recommendations
II. Legal Framework
A. Section 232 Requirements
B. Discussion
III. Investigation Process
A. Initiation of Investigation
B. Public Comments
C. Public Hearing
D. Interagency Consultation
E. U.S. Producers' Survey Responses
IV. Product Scope of the Investigation
V. Background on the Industry
A. Global Competitiveness of U.S. Automobile Producers
B. U.S. Automobile Producers' Transition From Vertical
Integration to Outsourcing Automobile Parts Production
C. NAFTA and the Rise of Automobile and Automobile Parts
Production in Mexico Instead of the United States
1. The Rise of Automobile Assembly in Mexico and Offshoring of
Automobile Plants
2. Offshoring of Automobile Parts
VI. Analysis
A. Present Import Quantities of Automobiles Have Weakened the
American-Owned Automotive Industry
1. U.S. Automobile Production Volume Has Eroded Over Three
Decades Due to Imports
2. Market Penetration by Automobile Imports Is Significant
3. Low Priced Foreign-Owned Automobile Production and Imports
Have Caused Significant Market Penetration in the United States and
Have Suppressed U.S. Producers' Prices
B. Imports of Automobile Parts in Such Quantities as Are
Presently Found Threaten the Viability of the U.S. Automobile Parts
Industry
1. Imports of Automobile Parts Have Displaced U.S. Production,
and the United States Has Become Dependent on Imported Automobile
Parts that Are Critical to Defense Applications and National
Security
2. U.S. Producers of Automobile Parts Are Facing Downward
Pressure on Prices Due to Low U.S. Automobile Prices
C. Domestic Manufacturing and Domestic R&D in Technologies for
Engines, Transmissions, and Electrical Components Are Necessary for
National Security
1. The U.S. Military Relies on the Domestic Automotive Sector
for Technological Advancements
2. Growth of American-Owned R&D for Critical Automobile Parts Is
Essential to Strengthen U.S. National Security
D. Decline in Employment in the U.S. Automotive Industry
VII. Conclusion
VIII. Recommendation
Appendix A: Section 232 Investigation Notification Letter From
Secretary of Commerce Wilbur Ross to Secretary of Defense James
Mattis, and Letter from Secretary of Defense James Mattis to
Secretary of Commerce Wilbur Ross Regarding U.S. Defense and
National Security
Appendix B: Federal Register--Notice Request for Public Comments and
Public Hearing on Section 232 National Security Investigation of
Imports of Automobiles and Automobile Parts
Appendix C: Public Hearing Transcript
Appendix D: Details on U.S. Harmonized Tariff System (HS) Statistics
1. Automobile Parts HS-10 Codes
2. Automobile Parts Schedule B Codes
3. Passenger Vehicle HS-10 Codes
4. Passenger Vehicle Schedule B Codes
Appendix E: Technical Appendix--Detailed Economic Impact, R&D
Expenditure Estimates, and Methodology
1. Impact of Tariffs on Automobiles & Automobile Parts,
Recommendation Option 2
2. Methodology
Appendix F: Foreign Market Barriers Prevent U.S. Automobile
Producers' Growth
1. The European Union
2. China
3. Japan
4. South Korea
Appendix G: Recent Trade Negotiations With Canada and Mexico That
Impact the Recommendation
Appendix H: Risks to the U.S. Automotive Industry and U.S. National
Security if U.S. Sales of Automobiles Decline Further
I. Executive Summary
This report summarizes the findings of an investigation conducted
by the U.S. Department of Commerce (``Department'') pursuant to Section
232 of the Trade Expansion Act of 1962, as amended (19 U.S.C. 1862)
(``Section 232''), into the effects of imports of automobiles \1\ and
automobile parts on the national security of the United States. In
conducting this investigation, the Secretary of Commerce
(``Secretary'') noted the Department's prior investigations under
Section 232.\2\ Consistent with those investigations, the Secretary in
this investigation again determined that ``national security'' for
purposes of Section 232 includes the ``general security and welfare of
certain industries, beyond those necessary to
[[Page 62029]]
satisfy national defense requirements, that are critical to the minimum
operations of the economy and government.'' \3\
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\1\ For purposes of this investigation, automobiles include:
Passenger vehicles, including sedans, sport utility vehicles
(``SUVs''), crossover utility vehicles (``CUVs''), vans (including
minivans and cargo vans), and light trucks.
\2\ See, e.g., Department of Commerce, Bureau of Industry and
Security, The Effect of Imports of Steel on the National Security,
Jan. 2018 (``2018 Steel Report''); Department of Commerce, Bureau of
Industry and Security, The Effect of Imports of Aluminum on the
National Security, Jan. 2018 (``2018 Aluminum Report'').
\3\ Department of Commerce, Bureau of Export Administration, The
Effect of Imports of Iron Ore and Semi-Finished Steel on the
National Security, Oct. 2001 (``2001 Report'') at 5.
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On the basis of the facts considered in this investigation, the
Secretary finds that the impact of excessive imports on the domestic
automobile and automobile parts industry and the serious effects
resulting from the consequent displacement of production in the United
States is causing a ``weakening of our internal economy [that] may
impair the national security'' as set forth in section 232.\4\ In
making this determination, the Secretary examined the increase in
volume of subject imports and their effects on domestic prices,
domestic production, and research and development (``R&D'') relevant to
technological advancements for defense capabilities. As required by
section 232(d), the Secretary also considered the impact of foreign
competition on the economic welfare of the automobile and automobile
parts industry in the United States. He also considered other relevant
factors bearing on the state of the industry. As also required by
statute, the Secretary examined the effect of imports on national
defense requirements, including: U.S. production needed for such
requirements; existing and anticipated availabilities of the human
resources, products, raw materials, and other supplies and services
essential to the national defense; the requirements for growth of such
industries and such supplies and services including the investment,
exploration, and development necessary to assure such growth; and the
importation of goods in terms of their quantities, availabilities,
characters, and use as those affect such industries and the capacity of
the United States to meet national security requirements.
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\4\ 19 U.S.C. 1862(d).
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As also required by section 232(d), the Secretary recognized the
close relation of the economic welfare of the United States to its
national security; the impact of foreign competition on the economic
welfare of individual domestic industries; and any substantial
unemployment, decrease in revenues of government, loss of skills, or
any other serious effects resulting from the displacement of any
domestic products by excessive imports, without excluding other
factors, in determining whether a weakening of the U.S. economy by such
imports may impair national security. In particular, this report
assesses whether automobiles and certain automobile parts are being
imported ``in such quantities or under such circumstances as to
threaten to impair the national security.'' \5\ This report summarizes
the findings of the Secretary.
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\5\ 19 U.S.C. 1862(b)(3)(A).
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For purposes of this report, ``U.S. producers'' and ``domestic
producers'' of automobiles and automobile parts refer to both American-
owned and foreign-owned producers operating in the United States.\6\
Otherwise, specific reference is made to American-owned or foreign-
owned producers, as appropriate.
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\6\ For the purposes of this report, American-owned producers
are General Motors, Ford, and Tesla, as well as Chrysler for years
prior to 1998 and American Motors for 1985-1987. ``Producers'' and
``manufacturers'' are used interchangeably in this report.
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Findings
The automotive industry has traditionally been a great engine of
economic growth throughout history and, for decades, the strength of
the United States' automotive manufacturing sector has directly
contributed to the industrial base that provides the economic strength
and technological innovation that enables our armed forces to project
military power and maintain our status as a world power. Many of the
most important innovations and technological advancements over the past
100 years have come from the automotive sector, and the strength of
this sector drives technological advancements in the defense sector.
Today, the defense sector is heavily interconnected and reliant on the
automotive industry for R&D to meet current and future military
requirements such as vehicle electrification, autonomous driving,
hydrogen fuel cell products, advanced semiconductor utilization, radar,
laser and sonar ranging, global positioning system (``GPS'')
navigation, anti-lock brakes, reduction in vehicle weight
(``lightweighting''), and fuel efficiency efforts. Product development
in partnership between U.S. automotive manufacturers and defense
agencies results in technological advancements in military aircraft,
space aircraft, unmanned aerial systems, missiles, and submarines.
However, the United States' automobile industry's technological
leadership in innovation is quickly diminishing. In conducting this
investigation, the Secretary has found that significant import
penetration over the course of the past three decades has severely
weakened the U.S. automotive industry, as American-owned production of
automobiles and automobile parts has been reduced by imports and the
domestic manufacturing base has weakened. Overall, the share of global
R&D investments in the automotive sector attributable to the United
States has significantly declined and, today, the share of R&D
conducted by American-owned companies is a fraction of the share
conducted by foreign competitors. If production volumes continue to
decline domestically, the United States' contribution to automotive R&D
will further weaken and will impede the automobile industry's ability
to invest in the development of technologies that are imperative to
maintaining a leading edge in U.S. military capabilities.
This is especially significant for American-owned manufacturers.
The Secretary notes that, in the procurement of military equipment,
including military vehicles, automobiles, and automobile parts, the
United States' Department of Defense (``DOD'') relies predominantly on
suppliers located in the United States, both American-owned and
foreign-owned. However, because in a time of national emergency,
foreign-owned suppliers operating in the United States may not be
reliable sources of equipment, the DOD must be able to rely on a
sufficient presence of American-owned manufacturers for its military
needs. In addition, due to the high cost of technological innovation in
the automotive sector (and the significant revenue potential from
innovative developments), manufacturers fiercely protect their
technology and trade secrets in order to stay competitive, which means
that American-owned firms do not have access to technology and trade
secrets developed by foreign-owned firms and that, in time of war, when
foreign-owned firms may decline to share their R&D with the DOD, the
United States Government will not have access to all the latest
developments in the industry.\7\ With respect to highly-advanced
technologies that have significant, cutting-edge military applications,
moreover, firms tend to conduct R&D in their home countries where the
potential for intellectual property spillover and theft is reduced.
Thus, the U.S. military cannot depend on foreign-owned firms in the
United States to access to new technologies. For
[[Page 62030]]
these reasons, the Secretary determines that the United States cannot
rely on the presence of foreign-owned manufacturers in the United
States to help meet U.S. defense requirements.
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\7\ As much as 30 percent of industry revenue potential is
attributable to new services and emerging technologies in the
automotive sector. Jeff Desjardins, The Future of Automotive
Innovation, Feb. 15, 2018, <a href="https://www.visualcapitalist.com/future-automobile-innovation/">https://www.visualcapitalist.com/future-automobile-innovation/</a>.
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As set forth in this report, imports of automobiles and certain
automobile parts are impairing the strength of American-owned firms in
the automotive sector--in terms of both production and revenue needed
for R&D investments--and improving the conditions for such firms is
necessary to enable the development of technologies needed for our
national security requirements. In conducting this investigation, the
Secretary has made the following findings:
1. A Healthy U.S. Automobile and Automobile Parts Manufacturing
Industry Is Necessary for U.S. Defense and National Security
The rapid application of commercial breakthroughs in automobile and
automobile parts technologies is key to gaining competitive military
advantages and meeting defense requirements. From new engine and
powertrain technology, to lightweighting and advanced connectivity, the
DOD is actively working to incorporate technologies that have been the
subject of years of effort and billions of dollars of R&D by the U.S.
commercial automotive industry.\8\
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\8\ Appendix A--Letter from Secretary of Defense James Mattis to
Secretary of Commerce Wilbur Ross.
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While the U.S. defense industrial base is dependent on the
American-owned automotive sector for the development of high-tech
products and capabilities, the U.S. commercial automotive industry is
unable to survive solely by supplying the DOD. To this point, in 2017,
17.1 million automobiles were sold in the United States versus [TEXT
REDACTED] wheeled armored vehicles. According to the DOD, it is
commercial sales that generate the production volumes needed for
manufacturing efficiency, the revenues needed for R&D, and the profits
needed to sustain domestic automotive businesses.\9\ Armored vehicles
require highly sophisticated automobile parts, and it is commercial
scale that allows the DOD to benefit from reduced unit costs for
production of armored vehicles and cost effective access to new
technology. In other words, a strong presence of American-owned
companies in the United States industry allows for the development and
production of highly technologically-advanced products that are
essential to modern military applications for U.S. national defense.
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\9\ Consultations between Department of Commerce and Department
of Defense in August 2018.
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2. Imports of Automobiles and Automobile Parts Are Impairing the
Ability of the Domestic Industry To Meet National Defense Requirements
Production of automobiles in the United States has significantly
weakened over the past several decades as domestic production has been
replaced by an influx of low-priced imports from countries where
automotive markets are protected from foreign competition. These
conditions enable foreign producers to expand production in their home
markets, achieve significant economies of scale and reduce prices,
produce in excess of the needs of their domestic demand, export that
excess production to the United States, and capture a dominant and
growing share of the U.S. market.
Further, the imports of the types of automobile parts that are
critical to U.S. defense needs--namely engines and engine parts,
transmissions and powertrain parts, and electrical components--have
significantly displaced parts manufactured in the United States and
have weakened the domestic manufacturing base, including American-owned
automobile parts producers, such that the automotive industry in the
United States has become increasingly reliant on imported parts.
The contraction of the American-owned automotive industry, if
continued, will significantly impede the United States' ability to
develop technologically advanced products that are essential to our
ability to maintain technological superiority to meet defense
requirements and cost effective global power projection, as well as
provide the necessary R&D and manufacturing base in the event of a
national emergency.
3. Decline in U.S. R&D for Important Automotive Technologies Threatens
To Impair U.S. National Security
This report establishes that a strong and robust American-owned R&D
and manufacturing base for automobiles and automobile parts is vital to
national security. However, the increase in imports of automobiles and
automobile parts over three decades has put American-owned producers at
a competitive disadvantage vis-[agrave]-vis their foreign-owned
competitors in R&D expenditures. In 2017, R&D by American-owned
manufacturers amounted to only 20 percent of global R&D spending in
automobile production and only 7 percent of global R&D spending in
automobile parts, lagging behind European Union (``EU'') and Japanese
competitors, which together controlled 70 percent of global R&D
spending in vehicle production and nearly 90 percent in automobile
parts R&D. Additionally, the Asia Pacific region is now emerging as a
favored destination for R&D investments. Protected foreign markets,
which discriminate heavily against imports, have precluded American-
owned manufacturers from offsetting their decline in the U.S. market,
and thereby building R&D revenue by expanding sales through exports
abroad.
Because R&D expenditures are integral to promoting long-term
technological advancements in automation, electrification, and
connectivity that enable cost effective power projection and maintain
technological superiority for U.S. national defense, the lag in R&D
expenditures by American-owned manufacturers is weakening U.S.
innovation and, accordingly, the capacity of the United States to meet
national security requirements. Indeed, as the U.S. military relies
heavily on and adopts innovations from the commercial automotive
industry, a significant decline in American-owned automotive industry
investment and development also jeopardizes U.S. military leadership
and its ability to fulfill America's defense requirements. Domestic
conditions of competition must be improved by reducing imports so that
American-owned producers are able to increase R&D expenditures and
investment to assure the growth necessary to meet national defense
requirements, particularly in a time of national emergency.
Conclusion and Recommendations
Based on the findings in this report, the Secretary concludes that
the present quantities and circumstances of imports of automobiles and
certain automobile parts, specifically engines and engine parts,
transmissions and powertrain parts, and electrical components as
defined in Section VIII, are ``weakening our internal economy'' and
threaten to impair national security as set forth in Section 232.
As discussed throughout this report, the negative impact of imports
and the resulting displacement of production for the American-owned
automobile and automobile parts manufacturers are significant, and are
increasing given that the U.S. automobile market is experiencing a
decline in demand and contracting due to excessive imports. Defense
purchases alone are not sufficient to support a robust military vehicle
supply chain and R&D in key
[[Page 62031]]
automotive technologies (such as autonomous driving, vehicle
lightweighting, electrification, and connectivity) vital to meeting the
needs of national defense. Hence, American-owned automobile and
automobile parts manufacturers must have a robust presence in the U.S.
commercial market. Moreover, innovations generated by R&D investments
are necessary for manufacturers to remain competitive in both the
commercial automotive sector and the defense sector. It is that
innovation capability which is now at serious risk as imports continue
to displace American-owned production. An American-owned automotive
industry that is not competitive in the latest technologies, nor has
the ability to retain a large skilled workforce and attract the next-
generation workforce, will be unable to remain globally competitive and
ensure that the United States maintains the ability to produce cutting-
edge technologies that are essential to America's national security.
The foregoing factors explain the basis for the Secretary's
determination that the ``displacement of domestic products by excessive
imports''--in particular the displacement of automobiles and certain
automobile parts manufactured by American-owned firms--is causing a
``weakening of our internal economy'' that ``may impair the national
security.'' See 19 U.S.C. 1862(d). Therefore, the Secretary recommends
that the President take corrective action. See 19 U.S.C. Sec. 1862(c).
The Secretary recommends the following actions the President could
take as possible options to remove the threatened impairment of the
national security:
1. Direct further discussions and negotiations to obtain agreements
that address the threatened impairment of national security. Since this
investigation was initiated, there have been productive discussions
that could result in positive changes for the automotive industry in
the United States, and the United States has signed the USMCA. If these
discussions and the USMCA result in positive changes to the U.S.
automotive industry, the President could determine whether those
actions address the threatened impairment of the national security
found in this report.
As provided in section 232(c)(3), if appropriate agreements have
not been reached in a timely manner or if a negotiated agreement is not
being carried out, the President could determine that further action
under section 232 is necessary.
OR
2. Impose tariffs of up to 25 percent (in addition to any existing
duties) on imports of automobiles and certain automobile parts (engines
and parts, transmissions and powertrain parts, and electrical
components) in order to increase U.S. production of automobiles and
parts to a level sufficient to generate additional revenue to increase
R&D investments by American-owned (as well as foreign-owned)
manufacturers in the United States. Imports under USMCA Side Letters
would not be subject to the tariffs.
OR
3. Impose tariffs of up to 35 percent (in addition to any existing
duties) on imports of SUVs and CUVs, which will increase domestic
production and generate additional revenue to increase R&D investments
by American-owned (and foreign-owned) manufacturers in the United
States. The Department of Commerce would work with the U.S. Customs and
Border Protection on the most appropriate means to implement this
option if selected. Imports under USMCA Side Letters would not be
subject to the tariffs.
Exemptions
The President may wish to consider agreements that the United
States has renegotiated recently in determining whether specific
countries should be exempted from the proposed tariffs based on an
overriding national security interest of the United States. For
example, the President should consider the Republic of South Korea for
an exemption based on the recently improved agreement and strong
national security relationship. The Secretary recommends that any
determination to exempt a specific country should be made at the outset
and a corresponding adjustment be made to the final tariffs imposed on
the remaining countries. Any country exempted should be placed under a
quota to ensure that producers in that country do not increase exports
to the United States and to prevent transshipment through that country
of automobiles and automobile parts seeking to avoid tariffs. This
would ensure that overall imports of automobiles and automobile parts
to the United States remain at or below the level needed to enable
American-owned producers to reach levels of production sufficient to
increase R&D for technologies that are important to national defense.
II. Legal Framework
A. Section 232 Requirements
Section 232 provides the Secretary with the authority to conduct
investigations to determine the effect of imports of any article on the
national security of the United States. It authorizes the Secretary to
conduct an investigation if requested by the head of any department or
agency, upon application of an interested party, or upon his own
motion. See 19 U.S.C. 1862(b)(1)(A).
Section 232 directs the Secretary to submit to the President a
report with recommendations for ``action or inaction under this
section'' and requires the Secretary to advise the President if an
article that is the subject of the investigation ``is being imported
into the United States in such quantities or under such circumstances
as to threaten to impair the national security.'' See 19 U.S.C.
1862(b)(3)(A).
Section 232(d) directs the Secretary and the President to, ``in
light of the requirements of national security and without excluding
other relevant factors, give consideration to domestic production
needed for projected national defense requirements; the capacity of
domestic industries to meet such requirements; existing and anticipated
availabilities of the human resources, products, raw materials, and
other supplies and services essential to the national defense; the
requirements of growth of such industries and such supplies and
services including the investment, exploration, and development
necessary to assure such growth; and the importation of goods in terms
of their quantities, availabilities, character, and use as those affect
such industries and the capacity of the United States to meet national
security requirements.'' See 19 U.S.C. Sec. 1862(d).
Section 232(d) also directs the Secretary and the President in the
administration of this section to ``further recognize the close
relation of the economic welfare of the Nation to our national
security, and . . . take into consideration the impact of foreign
competition on the economic welfare of individual domestic industries''
and ``any substantial unemployment, decrease in revenues of government,
loss of skills or investment, or other serious effects resulting from
the displacement of any domestic products by excessive imports . . .
[or] other factors in determining whether such weakening of our
internal economy may impair the national security.'' See 19 U.S.C.
Sec. 1862(d).
Once an investigation has been initiated, Section 232 mandates that
the
[[Page 62032]]
Secretary provide notice to the Secretary of Defense that such an
investigation has been initiated. Section 232 (b)(2)(A) also requires
the Secretary to do the following:
(1) ``consult with the Secretary of Defense regarding the
methodological and policy questions raised in [the] investigation'';
(2) ``seek information and advice from, and consult with,
appropriate officers of the United States''; and
(3) ``if it is appropriate and after reasonable notice, hold
public hearings or otherwise afford interested parties an
opportunity to present information and advice relevant to such
investigation.'' \10\
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\10\ See 19 U.S.C. 1862(b)(2)(A). Department regulations (i) set
forth additional authority and specific procedures for such input
from interested parties, see 15 CFR Sec. Sec. 705.7-705.8, and (ii)
provide that the Secretary may vary or dispense with those
procedures ``[i]n emergency situations, or when in the judgment of
the Department, national security interests require it.'' Id. at
Sec. 705.9.
As detailed in Part III of this report, each of the legal
requirements set forth above has been satisfied.
In conducting the investigation, Section 232 permits the Secretary
to request that the Secretary of Defense provide an assessment of the
defense requirements of the article that is the subject of the
investigation. See 19 U.S.C. 1862(b)(2)(B).
Upon completion of a Section 232 investigation, the Secretary is
required to submit a report to the President no later than 270 days
after the date on which the investigation was initiated. See 19 U.S.C.
1862(b)(3)(A). The required report must:
(1) Set forth ``the findings of such investigation with respect
to the effect of the importation of such article in such quantities
or under such circumstances upon the national security'';
(2) set forth, ``based on such findings, the recommendations of
the Secretary for action or inaction under this section''; and
(3) ``[i]f the Secretary finds that such article is being
imported into the United States in such quantities or under such
circumstances as to threaten to impair the national security . . .
so advise the President . . .''
Id.
Department regulations require that an executive summary of the
report, excluding any classified or proprietary information, be
published in the Federal Register. Copies of the full report, excluding
any classified or proprietary information, must be available for public
inspection and copying. See 15 CFR 705.10.
Within 90 days after receiving a report in which the Secretary
finds that an article is being imported into the United States in such
quantities or under such circumstances as to threaten to impair the
national security, the President shall:
(1) ``determine whether the President concurs with the finding
of the Secretary;'' and
(2) ``if the President concurs, determine the nature and
duration of the action that, in the judgment of the President, must
be taken to adjust the imports of the article and its derivatives so
that such imports will not threaten to impair the national
security.'' See 19 U.S.C. 1862(c)(1)(A).
B. Discussion
Section 232 does not contain a definition of ``national security.''
However, both Section 232 and its implementing regulations at 15 CFR
part 705 contain non-exclusive lists of factors that the Secretary must
consider in evaluating the effect of imports on the national security.
Congress in Section 232 explicitly provides that ``national security''
includes, but is not limited to, ``national defense'' requirements. See
19 U.S.C. 1862(d). In the 2001 Report, the Department determined that
``national defense'' includes both defense of the United States
directly and the ``ability to project military capabilities globally.''
\11\
---------------------------------------------------------------------------
\11\ 2001 Report at 5 (supra n. 3). See also 2018 Steel Report
at 13; 2018 Aluminum Report at 12-13.
---------------------------------------------------------------------------
The Department also concluded in the 2001 Report that ``in addition
to the satisfaction of national defense requirements, the term
`national security' can be interpreted more broadly to include the
general security and welfare of certain industries, beyond those
necessary to satisfy national defense requirements that are critical to
the minimum operations of the economy and government.'' \12\ This
report, like the 2018 Steel Report and 2018 Aluminum Report, uses these
reasonable interpretations of ``national defense'' and ``national
security.'' \13\
---------------------------------------------------------------------------
\12\ Id.
\13\ See 2018 Steel Report at 13-14; 2018 Aluminum Report at 13.
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Section 232 directs the Secretary to determine whether imports of
any article are being made ``in such quantities or under such
circumstances'' that those imports ``threaten to impair the national
security.'' See 19 U.S.C. 1862(b)(3)(A). The statutory construction
makes clear that either the quantities or the circumstances, standing
alone, may be sufficient to support an affirmative finding. They may
also be considered together, particularly where the circumstances act
to prolong or magnify the impact of the quantities being imported.
The statute does not define a threshold for when ``such
quantities'' of imports are sufficient to threaten to impair the
national security, nor does it define the ``circumstances'' that might
qualify. Likewise, the statute does not require a finding that the
quantities or circumstances are currently impairing the national
security. Instead, the threshold question under Section 232 is whether
the importation of such article in ``such quantities or under such
circumstances'' ``threaten to impair the national security.'' See 19
U.S.C. 1862(b)(3)(A) (emphasis added). This formulation strongly
suggests that Congress expected that an affirmative finding under
Section 232 would occur before there is actual impairment of the
national security.
Additionally, in Section 232 Congress explicitly directed the
Secretary to consider the ``impact of foreign competition'' and ``the
displacement of any domestic products by excessive imports'' in
determining whether the ``weakening of our internal economy may impair
the national security,'' but made no reference to an assessment of the
sources of imports. Therefore, it appears likely that Congress
recognized adverse impacts might be caused by imports from allies or
other reliable sources. As a result, the fact that some or all of the
imports causing the harm are from reliable sources does not compel a
finding that those imports do not threaten to impair national security.
Indeed, as this report finds, the imports that threaten to impair the
national security largely come from allies of the United States.
However, as discussed further in Section VI.C, the United States cannot
be certain of its ability to access intellectual property needed to
maintain technological superiority and assure the ability to cost-
effectively project U.S. military power when that intellectual property
is under foreign ownership and control.
Section 232(d) contains a considerable list of factors for the
Secretary to consider in determining if imports ``threaten to impair
the national security'' \14\ of the United States, and this list is
mirrored in the implementing regulations. See 19 U.S.C. 1862(d) and 15
CFR 705.4. Congress was careful to note twice in Section 232(d) that
the list it provided, while mandatory, is not exclusive.\15\
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\14\ 19 U.S.C. 1862(b)(3)(A).
\15\ See 19 U.S.C. 1862(d) (``The Secretary and the President
shall, in light of the requirements of national security and without
excluding other relevant factors . . .'' This section also provides
that ``other serious effects resulting from the displacement of any
domestic products by excessive imports shall be considered, without
excluding other factors. . .'') (emphasis added).
---------------------------------------------------------------------------
Congress broke the list of factors into two parts using two
separate sentences.
[[Page 62033]]
The first sentence focuses directly on ``national defense''
requirements, thus making clear that ``national defense'' is a subset
of the broader term ``national security.'' The second sentence focuses
on the broader economy, and expressly directs that in the
administration of this section the Secretary and the President ``shall
further recognize the close relation of the economic welfare of the
Nation to our national security.'' See 19 U.S.C. 1862(d).\16\
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\16\ See also 50 U.S.C. 4502(a)(7), in which Congress explicitly
recognized ``much of the industrial capacity that is relied upon by
the United States Government for military production and other
national defense purposes is deeply and directly influenced by (A)
the overall competitiveness of the industrial economy of the United
States; and (B) the ability of industries in the United States, in
general, to produce internationally competitive products and operate
profitably while maintaining adequate research and development to
preserve competitiveness with respect to military and civilian
production . . .''
---------------------------------------------------------------------------
The first sentence directs the Secretary to ``give consideration to
domestic production needed for projected national defense requirements,
[and] the capacity of domestic industries to meet such requirements . .
.'' See 19 U.S.C. 1862(d). The report explains that projected national
defense requirements include a viable American-owned automobile and
automobile parts manufacturing industry because military vehicles rely
on commercial R&D for important innovations and on domestic
manufacturers for parts and production facilities. The report takes
into consideration the threat of American-owned producers exiting the
U.S. economy and how a reduction in domestic production impacts the
ability to meet national defense requirements.
The first sentence further directs the Secretary to consider
``existing and anticipated availabilities of . . . supplies and
services essential to the national defense . . .'' See 19 U.S.C.
1862(d). The report discusses the declining market shares of American-
owned automobile producers in the United States. The report considers
that imports continue to displace automobiles produced by American-
owned firms in the United States, as well as automobile parts produced
in the United States, and the resulting impact on R&D spending in the
United States. In a time of national emergency where the United States
might be dependent solely on resources within its own borders--
including manufacturing, a skilled workforce, and R&D--it is essential
to strengthen such capabilities in the United States so that they are
fully deployable when demanded for national security.\17\
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\17\ See also 50 U.S.C. 4502(a)(8) recognizing that ``the
inability of industries in the United States, especially smaller
subcontractors and suppliers, to provide vital parts and components
and other materials would impair the ability to sustain the Armed
Forces of the United States in combat for longer than a short
period.''
---------------------------------------------------------------------------
Lastly, the first sentence directs the Secretary to consider, ``the
requirements of growth of such industries and such supplies and
services including the investment, exploration, and development
necessary to assure such growth, and the importation of goods in terms
of their quantities, availabilities, character, and use as those affect
such industries and the capacity of the United States to meeting
national security requirements.'' See 19 U.S.C. 1862(d). The report
details the interdependence between R&D in the automotive sector and
U.S. national security.
The factors listed in the second sentence of Section 232(d) are
also relevant for this investigation. Under the second sentence, the
Secretary and the President are required to ``recognize the close
relation of the economic welfare of the Nation to our national
security, and shall take into consideration the impact of foreign
competition on the economic welfare of individual domestic industries,
and any substantial unemployment, decrease in revenues of government,
loss of skills or investment, or other serious effects resulting from
the displacement of any domestic products by excessive imports.'' The
report takes into consideration the impact of excessive imports of
automobiles and certain automobile parts on the American-owned
automotive industry by reducing employment, weakening R&D, and causing
a loss of vital skills and technological know-how in the workforce, all
factors that must be considered when assessing threats to the national
security from excessive imports. See 19 U.S.C. 1862(d).
It is these factors that the report considers which have resulted
in a decline in American-owned manufacturing needed to support the
research and development of technologies that maintain America's
ability to cost-effectively project military power worldwide. This
decline threatens the national security. The Secretary finds that this
``weakening of our internal economy,'' by a continued decline of the
American-owned automobile and automobile parts manufacturing base and
related R&D, ``may impair the national security.'' See 19 U.S.C.
1862(d).
Thus, the Secretary determines that the products listed in Section
VIII are being imported into the United States in such quantities or
under such circumstances as to threaten to impair the national
security. See 19 U.S.C. 1862(b)(3)(A).
III. Investigation Process
A. Initiation of Investigation
On May 23, 2018, Secretary of Commerce, Wilbur Ross initiated an
investigation to determine the effect of imported automobiles and
automobile parts on national security under Section 232 of the Trade
Expansion Act of 1962, as amended (19 U.S.C. 1862).
Pursuant to Section 232(b)(1)(B), the Department notified the U.S.
Department of Defense with a May 23, 2018 letter from Secretary Ross to
the Secretary of Defense, James Mattis.\18\
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\18\ 19 U.S.C. 1862(b)(1)(B). See Appendix A: Section 232
Investigation Notification Letter to Secretary of Defense James
Mattis, (May 23, 2018).
---------------------------------------------------------------------------
On May 30, 2018, the Department published in the Federal Register a
notice announcing the initiation of this investigation to determine the
effect of imports of automobiles and automobile parts on the national
security. The notice also announced the opening of the public comment
period as well as a public hearing to be held on July 19 and July 20,
2018.\19\
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\19\ See Appendix B for Department of Commerce, ``Notice of
Request for Public Comments and Public Hearing on Section 232
National Security Investigation of Imports of Automobiles, including
Cars, SUVs, Vans and Light Trucks, and Automotive Parts,'' 83 FR
24,736-24,737 (May 30, 2018). Also included in Appendix B is the
subsequent Department of Commerce Notice, ``Public Hearing on
Section 232 National Security Investigation of Imports of
Automobiles, Including Cars, SUVs, Vans and Light Trucks, and
Automotive Parts; Change of Date for the Public Hearing,'' 83 FR
32,833 (Jul. 16, 2018).
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B. Public Comments
On May 30, 2018, the Department invited interested parties to
submit written comments, opinions, data, information, or advice
relevant to the criteria listed in Section 705.4 of the National
Security Industrial Base Regulations (15 CFR 705.4) as they affect the
requirements of national security, including the following:
a. The quantity and nature of imports of automobiles, including
cars, SUVs, vans and light trucks, and automotive parts and other
circumstances related to the importation of automobiles and
automotive parts;
b. Domestic production needed for projected national defense
requirements;
c. Domestic production and productive capacity needed for
automobiles and automotive parts to meet projected national defense
requirements;
d. The existing and anticipated availability of human resources,
products, raw materials,
[[Page 62034]]
production equipment, and facilities to produce automobiles and
automotive parts;
e. The growth requirements of the automobiles and automotive
parts industry to meet national defense requirements and/or
requirements to assure such growth, particularly with respect to
investment and research and development;
f. The impact of foreign competition on the economic welfare of
the U.S. automobiles and automotive parts industry;
g. The displacement of any domestic automobiles and automotive
parts causing substantial unemployment, decrease in the revenues of
government, loss of investment or specialized skills and productive
capacity, or other serious effects;
h. Relevant factors that are causing or will cause a weakening
of our national economy;
i. The extent to which innovation in new automotive technologies
is necessary to meet projected national defense requirements;
j. Whether and, if so, how the analysis of the above factors
changes when U.S. production by majority U.S.-owned firms is
considered separately from U.S. production by majority foreign-owned
firms; and
k. Any other relevant factors.\20\
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\20\ Id. In response to requests from interested parties, the
Department issued a Notice of Request for Public Comments and Public
Hearing; Extension of Comment Period, 83 FR 28801 (Jun. 21, 2018),
extending the due date for comments to June 29, 2018 and rebuttal
comments to July 13, 2018.
The public comment period ended on June 29, 2018, and public
rebuttal comment period ended on July 13, 2018. The Department received
2,356 written public comment submissions concerning this investigation.
All public comments were carefully reviewed and factored into the
investigation process. A listing of all public comments is available at
the U.S. Government's <a href="http://Regulations.gov">Regulations.gov</a> website specific to this
investigation: <a href="https://www.regulations.gov/docket?D=DOC-2018-0002">https://www.regulations.gov/docket?D=DOC-2018-0002</a>.
C. Public Hearing
The Department held a public hearing to collect additional
information concerning this investigation in Washington, DC on July 19,
2018. The second day of the hearing, originally scheduled for July 20,
was cancelled because all parties who wished to participate could be
accommodated in one day. The Department heard testimony from 44
witnesses at the hearing. The complete hearing transcript is included
in Appendix C.
D. Interagency Consultation
In addition to the required notification provided by the May 23,
2018 letter from Secretary Ross to Secretary Mattis,\21\ the Department
carried out the consultations required under Section 232(b)(2).\22\
Department staff consulted with counterparts at the DOD and U.S.
Customs and Border Protection regarding any methodological and policy
questions that arose during the investigation.\23\
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\21\ See Appendix A.
\22\ 19 U.S.C. 1862(b)(2).
\23\ Id.
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Secretary Mattis also communicated the views of the DOD in a
November 15, 2018 letter to Secretary Ross.\24\ In that letter,
Secretary Mattis noted that the Department of Commerce had consulted
with the DOD and stressed the importance of the automobile sector and
related technologies to U.S. defense requirements and national security
needs. Specifically, Secretary Mattis stated:
---------------------------------------------------------------------------
\24\ See Appendix A: Letter from Secretary of Defense James
Mattis to Secretary Ross conveying DOD views on Section 232
investigation on imports of automobiles and automobile parts, Nov.
15, 2018.
A healthy U.S. automotive sector supports the manufacturing
ecosystem vital to our national defense industrial base. As noted in
the National Defense Strategy, ``new commercial technology will
change society and, ultimately, the character of war.'' Therefore,
U.S. automotive sector leadership in emerging technologies, like
autonomous systems, is also critical for continued Department of
Defense modernization.\25\
---------------------------------------------------------------------------
\25\ Id.
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E. U.S. Producers' Survey Responses
On June 29, 2018 and on July 25, 2018, respectively, the Department
issued industry surveys to U.S. automobile producers and U.S. armored
vehicle producers pursuant to 50 U.S.C. 4555. Information sought
included, inter alia, facilities and production data, joint venture
data, trade flows, supply chain data, sales and demand data, employment
information, conditions of competition, R&D information, and government
and defense activities. The principal goal of the survey was to assist
the Department in determining whether automobiles and automobile parts
are being imported into the United States in such quantities or under
such circumstances as to threaten to impair national security. The
resulting aggregate data have given the Department detailed industry
information that is otherwise not publicly available and was needed to
effectively conduct its analysis for this investigation.
Response to the Department's survey is required by law (50 U.S.C.
4555). Information furnished in the survey responses has been deemed
confidential and will not be published or disclosed except in
accordance with Section 705 of the Defense Production Act of 1950, as
amended (50 U.S.C. 4555). Section 705 prohibits the publication or
disclosure of this information unless the President determines that the
withholding of such information is contrary to the interest of the
national defense. Information will not be shared with any non-
government entity other than in aggregate form. The information is
protected pursuant to the appropriate exemptions from disclosure under
the Freedom of Information Act (``FOIA''), should it be the subject of
a FOIA request.
From June 29, 2018 to September 7, 2018, the following [TEXT
REDACTED] companies responded to the Department's questionnaires:
[TEXT REDACTED]
IV. Product Scope of the Investigation
The scope of this investigation includes passenger vehicles,
including sedans, sport utility vehicles (``SUVs''), crossover utility
vehicles (``CUVs''), and vans (including minivans and cargo vans);
light trucks (collectively ``automobiles''); and wheeled armored and
tactical vehicles used for U.S. military applications. The scope also
includes all categories of automobile parts used in automobiles and
armored vehicles, which are defined at multiple points throughout the
U.S. Harmonized System (``HS''). A complete listing of automobile and
automobile parts codes included in this investigation is provided in
Appendix D. As detailed in this report, the Secretary finds that
imports of automobiles and imports of engines, engine parts,
transmissions, powertrain parts, and electrical components have
displaced and threaten further displacement of domestic production and
thereby threaten to impair the national security as set out in Section
232. For the purposes of this report, American-owned automobile
producers are General Motors (``GM''), Ford, and Tesla. Prior to 1998,
Chrysler was also American-owned. During 1985-1987, American Motors was
American-owned.
V. Background on the Industry
A. Global Competitiveness of U.S. Automobile Producers
The U.S. automotive industry has been one of the most powerful
forces driving the U.S. economy. Automobile manufacturing and
associated services industries employed 4.2 million workers in 2017,
amounting to 3 percent of total private sector employment. Of these
jobs, 953,000 were in automobile, automotive body, and automobile parts
manufacturing and an additional 3.3 million in service industries such
as
[[Page 62035]]
dealerships, repair shops, and automobile parts stores.\26\
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\26\ Department of Labor, Bureau of Labor Statistics, Automotive
Industry: Employment, Earnings, and Hours, <a href="https://www.bls.gov/iag/tgs/iagauto.htm">https://www.bls.gov/iag/tgs/iagauto.htm</a>.
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Global competition has greatly changed the industry over the years.
In the 1960s and 1970s, U.S. automobile producers enjoyed a dominant
position globally, as 48 percent of global automobile production
occurred in the United States, and all of those producers were
American-owned firms.\27\ The United States' competitive position in
the global marketplace did not last, however, as foreign competitors
aggressively penetrated the global market and captured a significant
portion of global market share. By 1985, automobile production in the
United States as a percentage of global automobile production declined
to 26 percent, then to 18 percent in 2005, and to 12 percent in 2017 as
shown in Figure 1A.\28\ In 2017, American-owned manufacturers within
the United States and abroad held only 12 percent of the global market
which, as shown in Figure 1B, represents a significant decline from the
36 percent of global market share held by American-owned manufacturers
in 1995. The decline in global market share reflects the rise of
foreign-owned producers and the weakening of the U.S. automotive
manufacturing base.
---------------------------------------------------------------------------
\27\ Wards Intelligence InfoBank.
\28\ Id. (These figures include foreign-owned manufacturers in
the United States.)
---------------------------------------------------------------------------
The 2008-2009 worldwide economic downturn exacerbated the
contraction of U.S. market share in the global automotive sector, and
in 2009 U.S. automobile production in the aggregate (by American-owned
and foreign-owned firms) declined to 5.7 million units, which is just
nine percent of global production.\29\ Although global production
rebounded from 72.8 million units in 2007 to 96.2 million units in
2017,\30\ the rise in production volume was largely attributed to
China's dramatic rise, growing from less than 8.9 million units in 2007
to 29.0 million units in 2017.\31\ China became the number one
automobile producing country in 2009, and in 2017 produced over 25
percent of the world's supply of automobiles.\32\ The EU, Japan, South
Korea, Canada, and Mexico are also major producers of automobiles, and
are the top sources of automobile imports into the United States.
Manufacturers in the United States, Japan, and the EU moved some
automobile production for the North and South American markets to
Mexico, leading to an increase in production there. Despite significant
automobile production in Canada and Mexico, there are no Canadian- or
Mexican-owned automobile producers in those counties.
---------------------------------------------------------------------------
\29\ Id.
\30\ Id.
\31\ Id.
\32\ Id.
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BILLING CODE 3510-DR-P
[GRAPHIC] [TIFF OMITTED] TN08NO21.023
[[Page 62036]]
[GRAPHIC] [TIFF OMITTED] TN08NO21.024
BILLING CODE 3510-DR-C
Globally, the four largest automobile producers in 2017 were GM,
Toyota, Volkswagen, and Ford, and each manufacturer produces and sells
a significant percentage of its automobiles in its home country.
Further, because global automobile production is regionally focused,
the world's leading manufacturers also produce automobiles in foreign
markets to supply local customers. As summarized in Table 1 below, 23
percent and 39 percent of automobiles produced by American-owned
manufacturers GM and Ford, respectively, in 2017 were made in the
United States. Similarly, 35 percent of automobiles produced by Toyota
and 18 percent produced by Volkswagen were made in their home markets.
BILLING CODE 3510-DR-P
[GRAPHIC] [TIFF OMITTED] TN08NO21.025
[[Page 62037]]
The automobile industry in the United States consists of 14 major
manufacturers: American-owned GM, Ford, and Tesla, and 11
``transplant'' manufacturers, i.e., manufacturing facilities that are
ultimately owned by corporations headquartered abroad.\33\
---------------------------------------------------------------------------
\33\ Wards Intelligence InfoBank. Volvo began production at its
Charleston, South Carolina plant in October 2018 and is therefore
not included in Figure 2.
[GRAPHIC] [TIFF OMITTED] TN08NO21.026
BILLING CODE 3510-DR-C
Three major trends in automobile manufacturing are (1) continuing
efforts to cut costs to remain globally competitive, (2) improving
technological advancements in design and materials used to decrease
vehicle weight (``lightweighting'') and enhance fuel efficiency, and
(3) developing advanced technologies needed for increased vehicle
connectivity, electrification and autonomous driving. Manufacturers are
increasingly cutting costs through automation and by relocating
production to less expensive regions. The tariff reductions achieved in
1994 through the North American Free Trade Agreement (``NAFTA'')
incentivized offshoring of automobile and automobile parts production
to Mexico where input costs, particularly labor, were significantly
cheaper.\34\
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\34\ See Section V, Part C.
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B. U.S. Automobile Producers' Transition From Vertical Integration to
Outsourcing Automobile Parts Production
The automotive industry responded to declining profits and
structural and technological changes in the late 1980s by switching
from a vertically-integrated supply structure to a model that
increasingly sourced automobile parts from independent suppliers
serving multiple customers. This global shift was especially dramatic
in the United States, where automobile producers were under tremendous
pressure to become more efficient and reduce costs to compete with
imports. Producers opted to purchase large modules and subassembly
systems ready for installation on their assembly lines, rather than
assemble thousands of individual parts as before. In the United States,
union wages were lower for component companies than for original
equipment manufacturers (``OEMs''). Over time, U.S. automobile
producers also shifted to negotiating large long-term contracts with a
select group of tier-1 suppliers.\35\ As parts suppliers became
separate entities from the automobile producers, the parts suppliers
were forced to assume more responsibility for R&D and the design of
innovative modules and systems and they began to maintain large
inventories of various automobile parts.\36\ The percentage of parts
that independent suppliers contribute to a vehicle has grown from 40-50
percent in the early 1990s to over 70 percent today.\37\
---------------------------------------------------------------------------
\35\ A tier-1 supplier provides components directly to the OEM.
\36\ Thomas Klier and James Rubenstein, Who Really Made Your
Car, The Federal Reserve Bank of Chicago, Chicago Fed Letter, No.
255a, Oct. 2008, https://www.chicagofed.org/~/media/publications/
chicago-fed-letter/2008/cfloctober2008-255a-pdf.pdf.
\37\ Patrick McGee, Carmakers Face Threat from New Drivers of
Profit, Financial Times, Aug. 8, 2017, <a href="https://www.ft.com/content/40065b50-715e-11e7-93ff-99f383b09ff9">https://www.ft.com/content/40065b50-715e-11e7-93ff-99f383b09ff9</a>.
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[[Page 62038]]
The shift away from the vertical integration of automobile and
automobile parts production is also essential to understanding the
nature of automotive industry employment. The automotive supply chain
has become the backbone of the automobile assembly industry, employing
more people than the automobile producers. In 1990, 271,400 automobile
manufacturing employees and 653,000 automobile parts employees produced
9.5 million vehicles in the United States. After a decade of record
high automobile production, beginning in 2001 automobile manufacturing
employment declined each year to a low of 146,400 workers in 2009. For
automobile parts manufacturing, employees increased by 29 percent to a
high of 839,500 in 2000 before falling to a low of 413,700 workers in
2009. While employment overall rebounded somewhat after 2009, in 2017
workers in both the automobile sector (212,000 employees) and
automobile parts sector (586,300 employees) remain 29 percent below
their 2000 levels, despite record demand.\38\ Many of these jobs moved
offshore as a result of import competition in the United States and
lower labor costs available abroad.\39\
---------------------------------------------------------------------------
\38\ Department of Labor, Bureau of Labor Statistics, Employees
for Motor Vehicles (NAICS 3361) and Motor Vehicle Parts (3363)
industries, <a href="https://www.bls.gov/iag/tgs/iagauto.htm">https://www.bls.gov/iag/tgs/iagauto.htm</a>.
\39\ Thomas H. Klier and James M. Rubenstein, Imports of
Intermediate Parts in the Auto Industry--A Case Study, November 6-7,
2009, <a href="https://upjohn.org/measurement/klier-rubenstein-final.pdf">https://upjohn.org/measurement/klier-rubenstein-final.pdf</a> at
4.
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C. NAFTA and the Rise of Automobile and Automobile Parts Production in
Mexico Instead of the United States
The contraction of the U.S. automotive industry has been ongoing
for decades, but the contraction became more dramatic after NAFTA went
into effect and caused a significant portion of the U.S. industry to
shift production to Mexico. Prior to NAFTA, Mexico had in place a
restrictive decree that limited automotive trade. NAFTA, however,
expanded to Mexico the existing integration of the U.S. and Canadian
automotive manufacturing supply chain created under the Canada-United
States Automotive Products Agreement (signed in 1965) and the U.S./
Canada Free Trade Agreement (signed in 1989). NAFTA's elimination of
customs tariffs allowed automobile producers and automobile parts
suppliers to optimize operational structures by relocating assembly
operations and supply chain manufacturing to Mexico the most cost
competitive location within North America. The results of the shift in
supply chain are dramatic. Since NAFTA's entry into force, the value of
U.S. imports of automobile parts from Mexico increased by 652 percent,
and the value of automobile imports from Mexico increased by over 1,000
percent.\40\
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\40\ Department of Commerce, Census Bureau, International Trade
Management Division. Retrieved from Trade Policy Information System
(TPIS) Database: USHS IMPORTS, Revised Statistics for 1989-2017.
---------------------------------------------------------------------------
1. The Rise of Automobile Assembly in Mexico and Offshoring of
Automobile Plants
Mexico's ability to compete for new North American automotive
investments under NAFTA stemmed primarily from the country's relatively
lower labor costs. Automobile assembly compensation had been
approximately 80 percent lower in Mexico than in the United States, and
labor represented a sizeable share of the production cost for
automobiles.\41\ For example, from 2008 to 2013, the average hourly
wage in Mexico was $5.89 ($US, nominal) for the automobile sector.
These wages were slightly more than one-seventh of the comparable wage
in the United States.\42\ In 2016, the hourly wage for workers in the
automobile sector was $4.65 in Mexico compared to $40.17 in the United
States.\43\ In Mexico, dollar equivalent wages decreased because the
currency depreciated sharply in comparison to the U.S. dollar.\44\ This
large disparity in wages resulted in significant cost savings to
manufacturers. One analysis estimated that assembling an automobile in
Mexico resulted in an average cost savings of $1,200 for an automobile
sold in the United States and $4,300 for an automobile sold in
Europe.\45\ Lower Mexican wages, coupled with labor productivity that
is comparable to workers in the United States, influenced corporate
decisions to increase automobile assembly in Mexico.
---------------------------------------------------------------------------
\41\ Bernard Swiecki and Debbie Maranger Menk, The Growing Role
of Mexico in the North American Automotive Industry, Center for
Automotive Research, July 2016, <a href="http://www.cargroup.org/wp-content/uploads/2017/02/The-Growing-Role-of-Mexico-in-the-North-American-Automotive-Industry-Trends-Drivers-and-Forecasts.pdf">http://www.cargroup.org/wp-content/uploads/2017/02/The-Growing-Role-of-Mexico-in-the-North-American-Automotive-Industry-Trends-Drivers-and-Forecasts.pdf</a>.
\42\ International Labor Comparisons, The Conference Board,
<a href="https://www.conference-board.org/ilcprogram">https://www.conference-board.org/ilcprogram</a>.
\43\ Id. These data are calculated by the Conference Board's
International Labor Comparisons (ILC) program using the same
concepts and methodology as those developed by the Bureau of Labor
and Statistics. Compensation costs relate to all employees in
manufacturing and include (1) direct pay and (2) employer social
insurance expenditures and labor-related taxes.
\44\ Board of Governors of the Federal Reserve System, Foreign
Exchange Rates--G.5A Annual
\45\ Swiecki and Menk, The Growing Role of Mexico in the North
American Automotive Industry, supra.
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In fact, between 2011 and 2016, nine of the 11 announced new
automobile assembly plants in North America were built in Mexico,\46\
while the number of facilities in the United States declined. The large
rise in Mexican assembly investment is relevant because 80 percent of
Mexican vehicle production is exported to the United States.\47\ As
shown in Table 2, in 1985, there were 65 automobile assembly plants in
the United States and 12 plants in Canada, but only nine in Mexico. As
of 2017, the number of automobile assembly plants in the United States
declined by 30 percent to 46 plants, while the number of Mexican
automobile assembly plants doubled to 18. The number of Canadian
automobile assembly plants declined only modestly from 12 assembly
plants to 11 during the same period.\48\
---------------------------------------------------------------------------
\46\ Id.
\47\ Id.
\48\ Wards Intelligence InfoBank.
[GRAPHIC] [TIFF OMITTED] TN08NO21.027
[[Page 62039]]
In addition to low production costs, low tariffs on Mexican
automobile exports due to the broad reach of Mexico's numerous Free
Trade Agreements (``FTAs'') made it possible for the country to emerge
as a prime manufacturing and export base not only within North America,
but globally as well. Exports from Mexico to 46 countries are exempt
from automobile tariffs, including the 10 percent tariff the EU applies
to imported passenger vehicles.\49\ The domestic Mexican market for new
automobiles is relatively small, less than 10 percent the size of the
U.S. automobile market, and the growth of automobile production in
Mexico correspondingly includes a large share of automobiles
manufactured for export.\50\ Between 1990 and 2017, the percentage of
automobiles manufactured in Mexico for export increased from 34 percent
to 84 percent.\51\ Since 2010, moreover, automobile manufacturers
announced more than $24 billion in investments in Mexico, including
more than $6.5 billion in investments from Japanese firms, more than
$5.7 billion in investments from German firms, and more than $1.1
billion from South Korean firms.\52\
---------------------------------------------------------------------------
\49\ World Trade Organization, Tariff Download Facility, <a href="http://tariffdata.wto.org/">http://tariffdata.wto.org/</a>.
\50\ Department of Commerce, Census Bureau; Wards Intelligence
InfoBank.
\51\ Swiecki and Menk, The Growing Role of Mexico in the North
American Automotive Industry, supra.
\52\ Id.
---------------------------------------------------------------------------
The rise of Mexico as a major automobile producer has contributed
to the gradual decline of U.S. automobile production, as the U.S.-made
share of automobile production in North America, which was 78 percent
in 1990, dropped to 64 percent in 2017, as shown in Table 3.\53\ Some
analysts expect the share of production in the United States to drop to
below 60 percent by 2020 under the existing NAFTA rules.\54\
---------------------------------------------------------------------------
\53\ Wards Intelligence InfoBank.
\54\ Swiecki and Menk, The Growing Role of Mexico in the North
American Automotive Industry, supra.
---------------------------------------------------------------------------
Although Canada's share of North American production remained
relatively stable, going from 14 percent in 1985 to 13 percent in
2017,\55\ Canada's production volume is expected to rise in the near-
term as a result of Canada's 2016 Comprehensive Economic and Trade
Agreement (``CETA'') with the EU, which immediately eliminated the EU's
tariffs on Canada-made automobile parts (which had ranged up to 4.5
percent) and phases out tariffs on automobiles over seven years.\56\
---------------------------------------------------------------------------
\55\ Wards Intelligence InfoBank.
\56\ Sara Lewis, Canadian, EU Auto Industries Welcome Trade
Pact, WardsAuto, Feb. 24, 2017, <a href="https://www.wardsauto.com/industry/canadian-eu-auto-industries-welcome-trade-pact">https://www.wardsauto.com/industry/canadian-eu-auto-industries-welcome-trade-pact</a>.
[GRAPHIC] [TIFF OMITTED] TN08NO21.028
2. Offshoring of Automobile Parts
With the transition away from vertical integration in the global
automotive industry, automobile parts manufacturers have been under
systematic pressure from automobile producers to lower prices. In
response, suppliers explored different ways to cut costs and, soon
after NAFTA's implementation, they began supplementing and eventually
replacing significant domestic production with ``near shore''
production in Mexico. Consequently, U.S. imports of automobile parts
from Mexico increased rapidly. In 1990, U.S. imports of automobile
parts from Mexico were valued at $4.5 billion, accounting for 14
percent of total U.S. automobile parts imports. By 2004 (a decade into
NAFTA) U.S. imports of automobile parts from Mexico rose to $23.4
billion, accounting for almost 30 percent of total automobile parts
imports.\57\ And in 2017, U.S. imports of automobile parts from Mexico
reached $55.3 billion in total, accounting for 37 percent of overall
U.S. imports of automobile parts. Eleven percent of U.S. automobile
parts imports in 2017 came from Canada, and imports from Canada and
Mexico together accounted for 48 percent of total U.S. imports in 2017.
Of the remaining 52 percent of U.S. automobile parts imports in 2017,
13 percent originated from the EU and 36 percent were imported from
Asia, including Japan, South Korea, and China.\58\
---------------------------------------------------------------------------
\57\ Department of Commerce, Census Bureau.
\58\ Id.
---------------------------------------------------------------------------
According to ProMexico, an export promotion division of the
Government of Mexico, close to 90 of the global 100 tier-1 parts
suppliers have operations in Mexico.\59\ Although some of the
investments are for low value, labor-intensive goods like wire
harnesses, Mexico has also attracted automotive supplier investments
for higher value goods. For example, Mexico has expanded its powertrain
production numbers over the past several years and, from 2012 through
2015 alone, engine production in Mexico has increased by over 31
percent, from 2.8 million to 3.7 million engines, and is estimated to
have grown to 4.2 million units in 2018.\60\
---------------------------------------------------------------------------
\59\ Swiecki and Menk, The Growing Role of Mexico in the North
American Automotive Industry, supra.
\60\ Id.
---------------------------------------------------------------------------
Furthermore, automotive producers have increasingly chosen Mexico
as a place to locate R&D centers.\61\ GM, Ford, Toyota, Volkswagen,
Nissan, and numerous automobile parts companies already conduct
significant R&D activity in Mexico. U.S. industry considers university
graduates in Mexico to be just as skilled for R&D work as graduates in
the United States.\62\ With the tendency of automobile producers to
locate R&D facilities near assembly plants, Mexico is expected to
become a growing market for engineering jobs and an alternative market
to the United States. As R&D and its related skilled workforce shifts
from the United States to Mexico, the loss of specialized skills and
production know-how within the United States impedes the ability of
American-owned manufacturers to access a skilled workforce and advance
technologies that are critical for maintaining America's ability to
project power globally and respond in a national emergency.
---------------------------------------------------------------------------
\61\ Id.
\62\ Id.
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[[Page 62040]]
VI. Analysis
A. Present Import Quantities of Automobiles Have Weakened the American-
Owned Automotive Industry
In the U.S. automobile sector, there is substantial evidence that
imports have weakened the domestic industry and are causing the
American-owned segment of the industry to contract. Foreign-owned
automobile producers in the United States are able to offset the
economic effects of a contraction in the U.S. market by maintaining
significant sales volumes in their protected home markets. However, as
explained in Appendix F, under the present trade regime, American-owned
manufacturers are unable to meaningfully penetrate those same protected
foreign markets to offset their shrinking sales in the United States.
In fact, as shown in Figure 1B above, from 1995 to 2017 American-owned
automobile producers' share of the global automotive market contracted
by 24 percentage points, from 36 percent to 12 percent, while EU
automobile producers' share grew from 20 percent to 23 percent and
Japanese automobile producers' share stayed relatively steady at 26
percent and 24 percent during the same period. Clearly, American-owned
manufacturers are trailing behind their foreign-owned competitors in
the global market, which impacts their sales revenue and, hence, R&D
investments in technologies that are integral to maintaining America's
technological advantage in military applications. Consequently,
America's ability to cost-effectively project power globally is also
trailing behind. As set forth in Section VI.C, the U.S. military
depends heavily on innovation in the commercial automotive sector, and
in particular will depend on American-owned manufacturers' innovation
capabilities in time of war. The following sections analyze the impact
of imports on the U.S. automotive market, the weakened competitive
position of American-owned producers, and the consequent threat to the
impairment of national security.\63\
---------------------------------------------------------------------------
\63\ See 19 U.S.C. 1862(b) and (d).
---------------------------------------------------------------------------
1. U.S. Automobile Production Volume Has Eroded Over Three Decades Due
to Imports
The strength of the U.S. automotive industry has weakened since
1985. Evidence establishes that purchasers have increasingly shifted
away from domestically-produced automobiles to imported vehicles, and
data provided in Figure 3 show that from 1985 to 2017 demand for
automobiles in the U.S. market grew by 11 percent, but total domestic
production by both American- and foreign-owned firms declined by 4
percent. More specifically, U.S. demand for automobiles grew from 15.4
million units in 1985 to 17.1 million units in 2017, while production
by domestic automobile producers declined from 11.4 million units in
1985 to 10.9 million units in 2017.\64\ Over the same period, U.S.
imports of automobiles nearly doubled from 4.6 million units to 8.3
million units.\65\ Expressed as a percentage of market share (an
indicator of competitive strength), domestic producers' share of the
U.S. market declined over this 32-year period from 70 percent of
overall U.S. demand in 1985 to 52 percent in 2017.\66\ Production by
domestic manufacturers of automobiles held steady in 2018.\67\
---------------------------------------------------------------------------
\64\ According to Wards Intelligence InfoBank, U.S. automobile
production peaked at 12.6 million units in 1999, but subsequently
plummeted to 5.6 million units in 2009 as a result of the economic
recession. Although production ultimately recovered to 11.9 million
units in 2016, by 2017 production again slipped to 10.9 million
units.
\65\ Department of Commerce, Census Bureau.
\66\ Wards Intelligence InfoBank and Department of Commerce,
Census Bureau. Domestic producers' market share is calculated as
(domestic sales minus imports) divided by domestic sales.
\67\ Wards Intelligence InfoBank.
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BILLING CODE 3510-DR-P
[[Page 62041]]
[GRAPHIC] [TIFF OMITTED] TN08NO21.029
When disaggregated into passenger vehicles (sedans, SUVs, CUVs, and
vans) and light trucks, it becomes clear that the decline in U.S.
production has been concentrated in the passenger vehicle segment.
Figure 4 demonstrates that, for passenger vehicles overall, U.S. demand
increased by 13 percent, from 12.8 million passenger vehicles in 1985
to 14.4 million passenger vehicles in 2017, while U.S. production
decreased by 12.9 percent over the same period, from 9.6 million
passenger vehicles to 8.4 million passenger vehicles. Of the 8.4
million passenger vehicles produced in the United States in 2017,
approximately 6.8 million were sold in the United States in 2017.\68\
Expressed as a percentage of market share, domestic producers' share of
U.S. passenger vehicle sales declined from 72 percent in 1985 to 48
percent in 2017.\69\ Section VI.A.3 explains that this contraction is
due, in large part, to displacement by passenger vehicle imports.
---------------------------------------------------------------------------
\68\ Wards Intelligence InfoBank and Department of Commerce,
Census Bureau.
\69\ Wards Intelligence InfoBank.
---------------------------------------------------------------------------
[[Page 62042]]
[GRAPHIC] [TIFF OMITTED] TN08NO21.030
For light trucks, Figure 5 illustrates that U.S. demand held
constant at 2.7 million light trucks in both 1985 and 2017, while U.S.
production increased from 1.8 million light trucks to 2.6 million light
trucks during the same period. Of this 2.6 million, approximately 2.0
million trucks were sold in the United States in 2017.\70\ During the
same period, imports of light trucks decreased by 24 percent, from 1.1
million to 833,000.\71\
---------------------------------------------------------------------------
\70\ Wards Intelligence InfoBank and Department of Commerce,
Census Bureau.
\71\ Department of Commerce, Census Bureau. The United States
has imposed a 25 percent tariff on imports of light trucks since
1964 pursuant to Presidential Proclamation 3564 in 1964. U.S.
Presidential Proclamation No. 3564, Proclamation Increasing Rates of
Duty on Specified Articles, December 4, 1963, 77 Stat. 1035-1036,
<a href="https://www.govinfo.gov/content/pkg/STATUTE-77/pdf/STATUTE-77-Pg1035.pdf">https://www.govinfo.gov/content/pkg/STATUTE-77/pdf/STATUTE-77-Pg1035.pdf</a>.
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[[Page 62043]]
[GRAPHIC] [TIFF OMITTED] TN08NO21.031
Notably, the domestic performance of American-owned automobile
manufacturers (GM, Ford and Tesla) underpins the dramatic contraction
of production volumes in the United States. As shown in Figure 6, in
1985, American-owned automobile facilities in the United States
manufactured 11.0 million automobiles, representing 97 percent of
overall domestic (American- and foreign-owned) production of
automobiles. By 2017, American-owned production fell to 4.6 million
automobiles, amounting to 42 percent of domestic automobile production
(i.e., a decline of 6.3 million units), and production by American-
owned firms accounted for only 22 percent of total U.S. sales.\72\
---------------------------------------------------------------------------
\72\ Figure 6 accounts for the fact that Chrysler became
foreign-owned in 1998. See supra note 6.
---------------------------------------------------------------------------
[[Page 62044]]
[GRAPHIC] [TIFF OMITTED] TN08NO21.032
Figure 7 illustrates a similar trend for American-owned producers
in the passenger vehicle segment over the course of the past 32 years.
In 1985, American-owned U.S. manufacturers produced 9.3 million
passenger vehicles (sedans, SUVs, CUVs, and vans), representing 97
percent of domestic (American- and foreign-owned) production. By 2017,
American-owned production fell to 2.8 million passenger vehicles,
representing just 34 percent of domestic production and 17 percent of
domestic sales. As set forth in Section VI.C, this decline in
production depicts the loss of American-owned producers' competitive
position in the U.S. market (and globally, as described above), with
the consequence that declining sales revenue has weakened the United
States' ability to maintain a leadership position in R&D investments
needed to develop technologies that are critical to national defense.
[[Page 62045]]
[GRAPHIC] [TIFF OMITTED] TN08NO21.033
For light trucks, American-owned U.S. manufacturers have also
experienced a declining share of U.S. production over the past three
decades. They accounted for 94 percent of domestic production in 1985
(1.67 million units), a share that decreased to 68 percent (1.75
million units) in 2017.\73\ This relatively narrower decline is
attributed to U.S. consumers' preferences for American-made brands and
models of light trucks, and the 25 percent tariff imposed by the United
States on imports of light trucks since 1964.
---------------------------------------------------------------------------
\73\ Wards Intelligence InfoBank.
---------------------------------------------------------------------------
[[Page 62046]]
[GRAPHIC] [TIFF OMITTED] TN08NO21.034
Even accounting for the strong presence of American-owned producers
in the light truck segment, the overall competitive position of
American-owned automobile producers has been weakening over time, as
American-owned production volumes overall have steadily declined.
Expressed as a percentage of overall U.S. demand for automobiles, the
market share held by American-owned automobile manufacturers has
contracted sharply from 67 percent in 1985 (10.5 million units produced
and sold in the United States) to 22 percent in 2017 (3.7 million units
produced and sold in the United States) as illustrated in Figure 9,
with increases in demand and lost American-owned market share captured
by both imports and foreign-owned manufacturers in the United
States.\74\ [TEXT REDACTED].\75\ In other words, the share of the U.S.
market captured by imports plus vehicles produced in the United States
by foreign-owned firms increased from 33 percent in 1985 to 78 percent
in 2017.\76\
---------------------------------------------------------------------------
\74\ Wards Intelligence InfoBank; Department of Commerce, Census
Bureau.
\75\ U.S. Producers' Survey Responses, Question 2b. In 2017,
American-owned firms produced and sold in the U.S. market [TEXT
REDACTED].
\76\ Wards Intelligence InfoBank; Department of Commerce, Census
Bureau.
---------------------------------------------------------------------------
[[Page 62047]]
[GRAPHIC] [TIFF OMITTED] TN08NO21.035
For passenger vehicle sales where head-to-head competition with
foreign producers is greatest, Figure 10 shows that from 1985 to 2017
the market share held by American-owned firms' domestic production
declined from 70 percent to 16 percent.\77\ Also significant is the
fact that the market share claimed by light trucks produced in the
United States by American-owned manufacturers declined by eight percent
over the same period, as shown in Figure 11. American-owned
manufacturers now hold less than half (i.e., 47.7 percent) of the U.S.
market for light trucks. Section VI.A.3 below explains that imports of
both passenger vehicles and light trucks have displaced American-owned
U.S. production and threaten the ability of American-owned producers to
invest in the R&D that is critical to maintaining technological
innovation that enables America to maintain global military
superiority.
---------------------------------------------------------------------------
\77\ Wards Intelligence InfoBank.
---------------------------------------------------------------------------
[[Page 62048]]
[GRAPHIC] [TIFF OMITTED] TN08NO21.036
[[Page 62049]]
[GRAPHIC] [TIFF OMITTED] TN08NO21.037
2. Market Penetration by Automobile Imports Is Significant
Automobile producers continuously strive to increase production
scale to maximize profits. Indeed, scale is important because the
enormous startup costs associated with the launch of a new production
line must be amortized over substantial production and sales volumes in
order to maximize revenue and minimize unit costs. As set forth in
Appendix F, because automobile producers headquartered in the EU,
Japan, South Korea, and China are protected from import competition in
their respective home markets, these foreign producers are able to
utilize significant sales profits in those home markets to heighten
production to levels in excess of volumes needed to supply their
respective domestic markets. Those firms consequently become
increasingly export focused. Because the United States has the second
largest automobile demand market in the world,\78\ imposes a low 2.5
percent tariff on imports of passenger vehicles, and has a strong
economy that allows manufacturers to maximize profits, foreign
automobile producers take advantage of the open U.S. market to unload
excess production at significant financial gain. Figure 12 illustrates
this point using the United States' trade deficit in automobiles with
Germany, Japan, and the rest of the world.\79\
---------------------------------------------------------------------------
\78\ According to Wards Intelligence InfoBank, China is the
largest consumer market for automobiles.
\79\ This represents nominal figures, which do not take into
account inflationary and foreign exchange changes over time.
---------------------------------------------------------------------------
[[Page 62050]]
[GRAPHIC] [TIFF OMITTED] TN08NO21.038
BILLING CODE 3510-DR-C
This trade deficit underscores the significant disadvantage that
U.S. automobile producers have internationally as a result of protected
markets abroad. In 2017, manufacturers in the United States exported
2.0 million units ($56.9 billion U.S. dollars) compared to imports of
automobiles from abroad of 8.3 million units ($191.7 billion U.S.
dollars).\80\
---------------------------------------------------------------------------
\80\ Department of Commerce, Census Bureau.
---------------------------------------------------------------------------
From 1985 to 2017, overall imports of automobiles from all
countries almost doubled from 4.6 million units to 8.3 million units,
representing an increase from 30 percent of U.S. market share in 1985
to 48 percent in 2017 as shown in Figure 13.\81\ As noted above, of the
remaining 52 percent of U.S. market share, foreign-owned U.S.
manufacturing operations account for 30 percent and American-owned U.S.
manufacturing operations account for the remaining 22 percent. The fact
that imports and foreign-owned production of automobiles in the United
States accounted for 32 percent of the U.S. market share in 1985 but
now hold 78 percent of the U.S. market, and the fact that American-
owned automobile production in the United States declined by 6.3
million units over the same period (from 11.0 million units to 4.6
million units), underscores the displacement of American-owned
production in the United States by imports and by foreign-owned
manufacturers' U.S. production.\82\
---------------------------------------------------------------------------
\81\ Wards Intelligence InfoBank; Department of Commerce, Census
Bureau.
\82\ Id.
---------------------------------------------------------------------------
BILLING CODE 3510-DR-P
[[Page 62051]]
[GRAPHIC] [TIFF OMITTED] TN08NO21.039
By both volume and value, Mexico, Canada, Japan, South Korea and
the EU account for nearly 98 percent of automobiles imported into the
United States, although China is planning to rapidly grow exports to
the United States as well.\83\ Table 4 below lists the top sources of
automobile imports into the United States.
---------------------------------------------------------------------------
\83\ China's intentions to dominate production of advanced
technologies such as electric vehicles is detailed in the Section
301 Report on China prepared by the United States Trade
Representative. A 2009 Chinese Central Government ``Opinion''
targets a 10 percent share of global automobile parts exports for
Chinese automobile producers by 2020. Several provinces including
Anhui, Chongqing, and Zhejiang have issued 5-year plans (their 13th)
seeking increased automotive exports in response to these
directives. See Findings of the Investigation Into China's Acts,
Policies, and Practices Related to Technology Transfer, Intellectual
Property, and Innovation Under Section 301 of the Trade Act of 1974,
Office of the United States Trade Representative, Executive Office
of the President, March 22, 2018, <a href="https://ustr.gov/sites/default/files/Section%20301%20FINAL.PDF">https://ustr.gov/sites/default/files/Section%20301%20FINAL.PDF</a> at 139. See also Shai Oster, Excess
auto capacity in China could leave dents in car makers, Wall Street
Journal, November 17, 2005, <a href="https://www.wsj.com/articles/SB113218114486399413">https://www.wsj.com/articles/SB113218114486399413</a>.
[GRAPHIC] [TIFF OMITTED] TN08NO21.040
U.S. imports of light trucks are subject to a 25 percent tariff
rate, except where the tariff is removed by an FTA such as NAFTA.\84\
Consequently, there is a notable lack of import competition from non-
FTA regions but significant import
[[Page 62052]]
penetration from Mexico where light trucks are largely produced for the
U.S. market. In 2017, imports from Mexico represented over 96 percent
of the overall volume and value of light truck imports into the United
States.
---------------------------------------------------------------------------
\84\ International Trade Commission, Official Harmonized Tariff
Schedule, <a href="https://www.usitc.gov/tata/hts/index.htm">https://www.usitc.gov/tata/hts/index.htm</a>.
[GRAPHIC] [TIFF OMITTED] TN08NO21.041
In contrast, because U.S. imports of passenger vehicles are subject
to a low 2.5 percent tariff, or zero tariff from FTA countries,\85\
there is significant import penetration in this segment. By both volume
and value, Mexico, Canada, Japan, South Korea and the EU account for
over 97 percent of the overall U.S. import volume of passenger
vehicles.
---------------------------------------------------------------------------
\85\ Id.
[GRAPHIC] [TIFF OMITTED] TN08NO21.042
For every automobile market segment, moreover, the U.S. market has
witnessed an acceleration in imports over the past five years. [TEXT
REDACTED].\86\ In 2017, imports of automobiles by foreign-owned
manufacturers in the United States accounted for [TEXT REDACTED] of
total import volume, whereas imports by American-owned manufacturers
accounted for [TEXT REDACTED] of the import volume.\87\
---------------------------------------------------------------------------
\86\ U.S. Producers' Survey Responses, Question 4b.
\87\ Id.
[GRAPHIC] [TIFF OMITTED] TN08NO21.043
[[Page 62053]]
Table 8A further shows that, by market segment, imports were
largely sourced from producers in [TEXT REDACTED]. [TEXT REDACTED].
Whereas American-owned producers' imports in 2017 from North America
totaled [TEXT REDACTED] of their overall imports, foreign-owned
automobile producers' imports from regions outside North America
accounted for [TEXT REDACTED] of their overall imports. In other words,
while American-owned automobile producers expanded operations to [TEXT
REDACTED] to remain competitive in the U.S. market, foreign-owned
producers not only took advantage of the [TEXT REDACTED] integrated
North American supply chain to reap competitive gains in the U.S.
market, [TEXT REDACTED] to displace U.S. production by American-owned
firms. In fact, [TEXT REDACTED] of foreign-owned producers' [TEXT
REDACTED]. More specifically, EU automobile producers in the United
States [TEXT REDACTED] of their automobile [TEXT REDACTED], Japanese
producers in the United States [TEXT REDACTED] of their automobile
[TEXT REDACTED], and South Korean producers in the United States [TEXT
REDACTED] of their automobile [TEXT REDACTED].\88\
---------------------------------------------------------------------------
\88\ Id.
---------------------------------------------------------------------------
BILLING CODE 3510-DR-P
[GRAPHIC] [TIFF OMITTED] TN08NO21.044
[GRAPHIC] [TIFF OMITTED] TN08NO21.045
[[Page 62054]]
[GRAPHIC] [TIFF OMITTED] TN08NO21.046
Significantly, imports now exceed American-owned production in the
United States. As Table 9 demonstrates, in 2017 the United States
imported passenger vehicles and light trucks equal to 263 percent of
American-owned passenger vehicle production and 48 percent of domestic
light truck production, respectively. American-owned producers were not
operating at full capacity in 2017 and, thus, had the ability to
produce more vehicles.\89\
---------------------------------------------------------------------------
\89\ Board of Governors of the Federal Reserve System (US),
G.17. Capacity Utilization: Durable Manufacturing: Automobiles and
parts, <a href="https://www.federalreserve.gov/releases/g17/current/">https://www.federalreserve.gov/releases/g17/current/</a>.
[GRAPHIC] [TIFF OMITTED] TN08NO21.047
3. Low Priced Foreign-Owned Automobile Production and Imports Have
Caused Significant Market Penetration in the United States and Have
Suppressed U.S. Producers' Prices
Imported and domestically-produced automobiles compete head-to-head
in the same geographic markets based primarily on price, brand, and
quality, with price being a significant factor driving consumers'
purchasing decisions.\90\ From 2005 to 2017, the average unit value
(``AUV'') on retail sales of automobiles in the United States increased
by 13.0 percent,\91\ which is well below the 28.3 percent increase in
consumer prices over this period. \92\ Further, for both passenger
vehicles and light trucks each year during the 2013 to 2017 period,
Tables 10A, 10B, and 10C show that [TEXT REDACTED] and hence
contributed to the suppression of automobile prices in the United
States market.
---------------------------------------------------------------------------
\90\ Christian Wardlaw, 10 Top Reasons Why People Buy Specific
Cars, New York Daily News, Mar. 4, 2016, <a href="https://www.nydailynews.com/autos/buyers-guide/10-top-reasons-people-buy-specific-cars-article-1.2552707">https://www.nydailynews.com/autos/buyers-guide/10-top-reasons-people-buy-specific-cars-article-1.2552707</a>.
\91\ Wards Intelligence InfoBank.
\92\ Department of Labor, Bureau of Labor Statistics, Consumer
Price Index, <a href="https://www.bls.gov/cpi/">https://www.bls.gov/cpi/</a> (accessed January 24, 2019).
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[[Page 62055]]
[GRAPHIC] [TIFF OMITTED] TN08NO21.048
[GRAPHIC] [TIFF OMITTED] TN08NO21.049
[GRAPHIC] [TIFF OMITTED] TN08NO21.050
Figure 14 moreover shows that, between 2005 and 2017, the producer
price index for automobiles increased by 15 percent while the producer
price index for all manufactured goods increased by 27 percent.\93\
---------------------------------------------------------------------------
\93\ Department of Labor, Bureau of Labor Statistics, Producer
Price Index (PPI) for Automobiles.
---------------------------------------------------------------------------
[[Page 62056]]
[GRAPHIC] [TIFF OMITTED] TN08NO21.051
The slow growth of U.S. prices for automobiles is also attributable
to the low prices of foreign imports. As shown in Figure 15, since
2005, the average price of a domestically produced automobile in the
United States increased by 14 percent compared to a 5 percent increase
in the average price of imported automobiles.\94\ These data
demonstrate that low vehicle import prices permitted imports to capture
significant market share from U.S. producers.
---------------------------------------------------------------------------
\94\ Id.
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[[Page 62057]]
[GRAPHIC] [TIFF OMITTED] TN08NO21.052
BILLING CODE 3510-DR-C
When this analysis is disaggregated by passenger vehicles and light
trucks for a more recent comparison period, [TEXT REDACTED], as shown
in Figures 16 and 17 below. With respect to passenger vehicles, [TEXT
REDACTED]. For light trucks, [TEXT REDACTED].\95\
---------------------------------------------------------------------------
\95\ U.S. Producers' Survey Responses, Questions 2b; Department
of Commerce, Census Bureau.
---------------------------------------------------------------------------
Figure 16: AUVs of Passenger Vehicles: Domestic Production vs. Imports
[TEXT REDACTED]
Figure 17: AUVs of Light Trucks: Domestic Production vs. Imports
[TEXT REDACTED]
A more detailed examination of import prices reveals that
differences in prices have been most significant with respect to
imports from [TEXT REDACTED]. [TEXT REDACTED].\96\
---------------------------------------------------------------------------
\96\ U.S. Producers' Survey Responses, Question 2b; see also
Mike Monticello, Are Pickup Trucks Becoming the New Family Cars?,
Consumer Reports, Feb. 22, 2013, <a href="https://www.consumerreports.org/pickup-trucks/are-pickup-trucks-becoming-the-new-family-car/">https://www.consumerreports.org/pickup-trucks/are-pickup-trucks-becoming-the-new-family-car/</a>.
---------------------------------------------------------------------------
Figure 18: AUVs of Passenger Vehicles: Domestic Production vs. Imports
[TEXT REDACTED]
Figure 19: AUVs of Light Trucks: Domestic Production vs. Imports
[TEXT REDACTED]
Low-priced imports have placed significant competitive pressure on
U.S. producers throughout the market by preventing the price increases
that would otherwise have occurred. As explained below, from 2013 to
2017, [TEXT REDACTED], while during this period, the industry's total
cost of goods sold (``COGS'') [TEXT REDACTED] (from [TEXT
REDACTED].\97\ Accordingly, the [TEXT REDACTED].\98\
---------------------------------------------------------------------------
\97\ U.S. Producers' Survey Responses, Questions 2b and 3.
\98\ U.S. Producers' Survey Responses, Question 3.
---------------------------------------------------------------------------
In short, imported automobiles have prevented American-owned
automobile producers from increasing sales prices [TEXT REDACTED] in
producers' costs for producing vehicles in the United States. As
explained in Section VI.B and VI.C, this has negatively impacted
American-owned producers' ability to invest in technological
advancements that are critical to U.S. national security needs.
B. Imports of Automobile Parts in Such Quantities as Are Presently
Found Threaten the Viability of the U.S. Automobile Parts Industry
The automobile parts industry is experiencing a significant
revolution in technological advancements. In the area of intelligent
mobility technology, over the past decade, the electrical components
industry has made significant strides in advanced sensor systems,
vehicle automation, and vehicle connectivity. All major international
automobile producers are heavily investing in technology, and
advancements in electronic components are expected to accelerate over
the course of the next decade as automobiles transition to full
automation capabilities. In the area of light duty vehicle propulsion,
automobile engine and transmission technologies have rapidly progressed
because manufacturers, in response to
[[Page 62058]]
increasingly stringent emission and fuel economy regulations, have
invested in a broad portfolio of different lightweighting propulsion
technologies, including internal combustion engines, plug-in hybrid
vehicles, and fuel cell technologies. As set forth in Section VI.C.,
these innovations are integral to advancements in military vehicle
capabilities and, hence, U.S. defense requirements.
1. Imports of Automobile Parts Have Displaced U.S. Production, and the
United States Has Become Dependent on Imported Automobile Parts That
Are Critical to Defense Applications and National Security
In consultation with the DOD, the Secretary has specifically
determined that automobile engines and parts, transmissions and
powertrain parts, and electrical components are essential to national
security, and [TEXT REDACTED].\99\ [TEXT REDACTED].\100\ Further, U.S.
automobile producers are now more than ever relying on imports of such
automobile parts to satisfy their production needs.
---------------------------------------------------------------------------
\99\ U.S. Producers' Survey Responses, Questions 10a and 10b.
\100\ U.S. Producers' Survey Responses, Question 10b.
---------------------------------------------------------------------------
In fact, every U.S. producer of passenger vehicles--whether
American-owned or foreign-owned--imports a significant volume of
automobile parts for its vehicle production operations in the United
States. [TEXT REDACTED].\101\ As shown in Table 11A, American-owned
automobile producers have, on average, [TEXT REDACTED] \102\ Further,
both American-owned and foreign-owned producers reported [TEXT
REDACTED] [TEXT REDACTED].\103\ Table 11B below lists the major
countries from which U.S. automobile producers (whether American- or
foreign-owned) sourced automobile parts in 2017.
---------------------------------------------------------------------------
\101\ U.S. Producers' Survey Responses, Question 2b. [Although
average imported content was 35 percent, individual producers
reported imported content shares as high as 70 percent for some
market segments].
\102\ Id.
\103\ Id.
[GRAPHIC] [TIFF OMITTED] TN08NO21.053
[GRAPHIC] [TIFF OMITTED] TN08NO21.054
Substantial evidence demonstrates the extent to which import
penetration has significantly weakened U.S. production. With respect to
automobile engines, the United States has been a significant importer
of completed engines since 1989 when it imported 3.0 million engines,
or 29 percent of U.S. demand, for domestic automobile production.\104\
Between 1989 and 2017, production of automobiles in the United States
increased by 3 percent (from 10.6 million units to 10.9 million units),
while imports of automobile engines increased by 32 percent (from 3.0
million units to 4.0 million units).\105\ The 4.0 million units
imported in 2017 represents 37 percent of U.S. demand. Over this
period, imports of automobile engines from Mexico expanded by 1.1
million units (to 1.8 million units in 2017) and imports from Germany
grew by 190,000 units (to 450,000 units in 2017).\106\ By engine type,
American-owned producers sourced [TEXT REDACTED] of engines
domestically in the United States and foreign-owned producers sourced
[TEXT REDACTED] of engines in the United States in 2015.\107\
---------------------------------------------------------------------------
\104\ Department of Commerce, Census Bureau; Wards Intelligence
InfoBank. (Data prior to 1989 would not be directly comparable with
data for 1989 forward due to classification changes.
\105\ Department of Commerce, Census Bureau; Wards Intelligence
InfoBank.
\106\ Department of Commerce, Census Bureau.
\107\ U.S. Producers' Survey Responses, Question 6. (2015 is the
most recent year for which data were available.)
---------------------------------------------------------------------------
Furthermore, U.S. automobile producers have become increasingly
reliant on foreign suppliers for engine parts. In particular, from 1989
to 1999, the United States imported an average of $346 in parts per
engine produced, which grew from 2010 to 2017 to an import average of
$1,178 in parts per engine produced.\108\ As illustrated by
[[Page 62059]]
Figure 20, U.S. engine manufacturers have, in large part, transitioned
to assembly operations and away from manufacturing and innovation.\109\
---------------------------------------------------------------------------
\108\ Department of Commerce, Census Bureau; Wards Intelligence
InfoBank. (This represents nominal figures, which do not take into
account inflationary and foreign exchange changes over time.
Appropriate ``real'' figures are not publicly available.)
\109\ Id. Although the value and complexity of automobile
engines has increased over this period, the relative rate of growth
of the average unit value of imported engines (up 179 percent from
1989 to 2017) and imported parts per domestically-produced engine
(370 percent from 1989 to 2017) indicates that there is an increased
reliance on imported parts by U.S. engine manufacturers.
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BILLING CODE 3510-DR-P
[GRAPHIC] [TIFF OMITTED] TN08NO21.055
With respect to automobile transmissions, the United States has
long been a significant importer of completed transmissions. From 1989
to 2017, the United States imported, on average, 50 percent of
transmissions used in domestic automobile manufacturing.\110\ In 2017,
automobile manufacturers in the United States imported 5.1 million
completed transmissions representing 47 percent of domestic demand
while domestic production captured the remaining 53 percent.\111\ As
with engines, American-owned producers sourced [TEXT REDACTED] of
transmissions domestically in the United States whereas foreign-owned
producers sourced [TEXT REDACTED] of their transmissions in the United
States in 2015.\112\
---------------------------------------------------------------------------
\110\ Department of Commerce, Census Bureau; Wards Intelligence
InfoBank. Department of Commerce calculations.
\111\ Id.
\112\ U.S. Producers' Survey Responses, Question 6. (2015 is the
most recent year for which data were available.)
---------------------------------------------------------------------------
In addition to import penetration by transmissions displacing
domestic production, transmission producers in the United States have
increasingly shifted to foreign suppliers for the parts needed to build
transmissions. As shown in Figure 21, in 2000 the United States
imported $457 in parts per transmission produced domestically. By 2017
imports had increased to $1,226 in parts per transmission produced
domestically.\113\ U.S. transmission producers are increasingly
becoming assemblers; they are not developing emerging technologies
associated with next-generation transmissions, and thereby are reducing
the availability of the skills, equipment, and R&D needed to maintain
global leadership in this important component of automotive production
and defense mobility.
---------------------------------------------------------------------------
\113\ Department of Commerce, Census Bureau; Wards Intelligence
InfoBank. This represents nominal figures, which do not take into
account inflationary and foreign exchange changes over time.
Appropriate ``real'' figures are not publicly available. Includes
HS-10 codes 8708996700, 8708996790, and 8708996890 in addition to
the transmission parts listed in Section VIII to create a more
consistent time series.
---------------------------------------------------------------------------
[[Page 62060]]
[GRAPHIC] [TIFF OMITTED] TN08NO21.056
Finally, with respect to U.S. producers of electrical components,
domestic production has also been displaced by imports, as shown in
Figure 22. From 1999 to 2016 (latest available data), U.S. production
of electrical components declined by 4 percent while U.S. demand grew
steadily, with the result that imports captured all of the growth in
overall U.S. demand.\114\ In 1999, imports of electrical components
represented 29 percent of U.S. demand by value, \115\ and by 2016,
imports grew to 56 percent of U.S. demand by value. \116\ Further,
American-owned producers sourced [TEXT REDACTED] of electrical
components in the United States and foreign-owned producers sourced
[TEXT REDACTED] of electrical components in the United States in 2015
(latest available data).\117\
---------------------------------------------------------------------------
\114\ Bureau of Labor Statistics, Industry Productivity & Costs
Database, <a href="https://www.bls.gov/lpc/">https://www.bls.gov/lpc/</a>; Department of Commerce, Census
Bureau.
\115\ Demand is approximated to be U.S. production plus net
imports (imports less exports).
\116\ This refers to nominal value figures. However, over the
same period, an output index estimating the change in real
production shows a similar trend; U.S. output in the automobile
electrical and electronic equipment sector in 2016 was 5 percent
lower than output in 1999. Source: Bureau of Labor Statistics,
Industry Productivity & Costs Database, <a href="https://www.bls.gov/lpc/">https://www.bls.gov/lpc/</a>.
\117\ U.S. Producers' Survey Responses, Question 6.
---------------------------------------------------------------------------
[[Page 62061]]
[GRAPHIC] [TIFF OMITTED] TN08NO21.057
Tables 12A and 12B below illustrate the sourcing patterns of
American-owned and foreign-owned automobile producers in the United
States, [TEXT REDACTED].\118\ Excessive imports have weakened the U.S.
automobile parts manufacturing base, as these imported parts could have
been produced domestically.
---------------------------------------------------------------------------
\118\ U.S. Producers' Survey Responses, Question 6.
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[[Page 62062]]
[GRAPHIC] [TIFF OMITTED] TN08NO21.058
[GRAPHIC] [TIFF OMITTED] TN08NO21.059
BILLING CODE 3510(-DR-C
U.S. trade deficit data in Figures 23 and 24 further illustrate the
dramatic extent to which domestic production of automobiles has become
dependent on foreign-sourced parts. Although the United States has
consistently incurred a trade deficit in automobile parts over the past
30 years, this deficit has increased to record levels within the past
three years, reaching over $60 billion in 2017.\119\
---------------------------------------------------------------------------
\119\ Department of Commerce, Census Bureau. This represents
nominal figures, which do not take into account inflationary and
foreign exchange changes over time. Appropriate ``real'' figures are
not publicly available.
---------------------------------------------------------------------------
[[Page 62063]]
[GRAPHIC] [TIFF OMITTED] TN08NO21.060
Disaggregated by component type, the trade deficit in automobile
engines and parts, transmissions and powertrain parts, and electrical
components is equally as significant. Figure 24 shows that the trade
deficit in engines and engine parts grew from a deficit of $0.7 billion
in 1985 to a deficit of $15.2 billion in 2017, the deficit in
electrical components grew from a deficit of $211 million in 1985 to a
deficit of $12.7 billion in 2017, and the deficit in transmission and
powertrain parts grew from a deficit of $60 million in 1985 to a
deficit of $3.9 billion in 2017.\120\
---------------------------------------------------------------------------
\120\ Ibid.
---------------------------------------------------------------------------
[[Page 62064]]
[GRAPHIC] [TIFF OMITTED] TN08NO21.061
Further, a comparison of the increase in U.S. imports of overall
automobile parts to the decline in U.S. automobile production, as shown
in Figure 25, confirms that U.S. automobile producers have become
increasingly reliant on foreign-produced parts. As technological
innovations in engines, transmissions and electrical components are
critical for U.S. defense capabilities as set forth in Section VI.C,
the United States' increasing dependence on imports--and thereby loss
of the manufacturing base and related worker skills and technological
know-how for cutting-edge innovations with significant military
applications--poses a significant threat to national security.
[[Page 62065]]
[GRAPHIC] [TIFF OMITTED] TN08NO21.062
2. U.S. Producers of Automobile Parts Are Facing Downward Pressure on
Prices Due to Low U.S. Automobile Prices
As U.S. production of engines and parts, transmissions and
powertrain parts, and electrical components has been negatively
impacted by imports, producers--especially American-owned producers--in
the U.S. market are finding it difficult to stay competitive due to
escalating costs associated with technological advancements. Cost
increases have been driven, in large part, by advancements in vehicle
electronics, connectivity systems, safety features, advanced driver-
assistance systems, and autonomous vehicle technologies.\121\ To
illustrate, a McKinsey study of North American automobile parts
suppliers found that the aggregate average real cost of automobile
parts (indexed to 2010 dollars and adjusted to compensate for
inflation, productivity changes, and other macroeconomic forces) for
passenger vehicles was approximately $13,400 in 2010, and is expected
to rise to $15,900 by 2020, an increase of almost 20 percent. These
estimates also indicate that parts costs increased to approximately
$14,100 in 2013 and $15,100 in 2017 (with an overall 13 percent
increase from 2010).\122\ This presents a significant problem to
automobile parts suppliers, as they have been unable to increase prices
to help compensate for higher costs. Indeed, during the same 2010 to
2017 period, the average sales price of a new automobile in the United
States increased from $24,063 in 2010, to $24,454 in 2013, and to
$25,366 in 2017 (a five percent increase).\123\ That is to say, over
the same seven-year period, the average price of a vehicle increased
far less than the price increase associated with components. As
acknowledged by the McKinsey study, ``OEMs were unable to raise prices
for mass-market cars. In turn, [they] used their purchasing power to
limit suppliers' abilities to increase prices, even in the face of
higher input costs,'' thereby eroding automobile parts producers'
profitability.\124\
---------------------------------------------------------------------------
\121\ Jim Irwin, EV, AV Spending in Slowing Market Points to
`Pile Up,' WardsAuto, July 30, 2018, <a href="https://www.wardsauto.com/alternative-propulsion/ev-av-spending-slowing-market-points-pile?NL=WAW-04&Issue=WAW-04_20180730_WAW-04_297&sfvc4enews=42&cl=article_1_b&utm_rid=CPENT000004033195&utm_campaign=19649&utm_medium=email&elq2=017d7eb1c3c741dba293777515e91e6a">https://www.wardsauto.com/alternative-propulsion/ev-av-spending-slowing-market-points-pile?NL=WAW-04&Issue=WAW-04_20180730_WAW-04_297&sfvc4enews=42&cl=article_1_b&utm_rid=CPENT000004033195&utm_campaign=19649&utm_medium=email&elq2=017d7eb1c3c741dba293777515e91e6a</a>.
\122\ McKinsey & Company, The Future of the North American
Automotive Supply Industry, March 2012, https://www.mckinsey.com/~/
media/mckinsey/dotcom/client_service/automotive%20and%20assembly/
pdfs/the_future_of_the_north_american_automotive_supplier.ashx;
Department of Commerce calculations.
\123\ Wards Intelligence InfoBank.
\124\ McKinsey & Company, The Future of the North American
Automotive Supplier Industry, supra.
---------------------------------------------------------------------------
Further, for automobile producers' U.S. operations, [TEXT REDACTED]
from 2013 to 2017, while the average revenue earned per vehicle [TEXT
REDACTED].\125\ For American-owned automobile producers in particular,
[TEXT REDACTED].\126\ During the 2013 to 2017 period, American-owned
[[Page 62066]]
producer's [TEXT REDACTED]. As a result, the COGS-to-revenue ratio per
vehicle [TEXT REDACTED].\127\ That the average unit COGS for automobile
producers in the United States [TEXT REDACTED] makes clear that
American-owned producers of automobiles [TEXT REDACTED] in costs to
their U.S. customers, [TEXT REDACTED].
---------------------------------------------------------------------------
\125\ U.S. Producers' Survey Responses, Question 2a and Question
3.
\126\ Id.
\127\ Id.
---------------------------------------------------------------------------
Foreign-owned automobile producers operating in the U.S. market,
where a significant volume of automobile parts are sourced abroad [TEXT
REDACTED], have not experienced [TEXT REDACTED].\128\ From 2013 to
2017, foreign-owned producers' average per-vehicle COGS [TEXT
REDACTED], while their [TEXT REDACTED].\129\ This led to an overall
average COGS-to-revenue ratio [TEXT REDACTED], which means that
foreign-owned producers [TEXT REDACTED].\130\ Further, during the 2013
to 2017 period, foreign-owned automobile producers' [TEXT
REDACTED].\131\ Import prices, moreover, were [TEXT REDACTED], as noted
above.
---------------------------------------------------------------------------
\128\ Id.
\129\ Id.
\130\ Id.
\131\ Id..
---------------------------------------------------------------------------
In short, [TEXT REDACTED] given that low-priced imports have
prevented U.S. producers from increasing their automobile prices by a
sufficient margin to offset increases in costs. Additionally, as noted,
U.S. automobile producers often used their purchasing power to limit
price increases (or compel price decreases) by their parts
suppliers.\132\
---------------------------------------------------------------------------
\132\ See McKinsey & Company, The Future of the North American
Automotive Supplier Industry, supra.
---------------------------------------------------------------------------
Consequently, automobile parts are now being increasingly produced
in foreign countries. As previously shown in Figures 20 through 25,
automobile producers have become increasingly reliant on automobile
parts imported from foreign suppliers. Furthermore, the number of
automobile parts manufacturing establishments in the United States have
fallen, decreasing from 5,624 in 2005 to 4,948 in 2016.\133\ [TEXT
REDACTED].\134\ Domestic demand for automobile parts clearly exists,
but the contraction of the automotive parts manufacturing base in the
United States has impeded the growth of related R&D investments by
American-owned firms in technological advancements that are essential
for U.S. defense capabilities.\135\
---------------------------------------------------------------------------
\133\ U.S. Census Bureau, Business Patterns, NAICS code 3363.
\134\ U.S. Producers' Survey Responses, Questions 4-6.
\135\ John Moavenzadeh, Offshoring Automotive Engineering:
Globalization and Footprint Strategy in the Motor Vehicle Industry,
Dec. 1, 2006, <a href="https://www.nae.edu/File.aspx?id=10284&v=79e01bce">https://www.nae.edu/File.aspx?id=10284&v=79e01bce</a>. The
erosion of the U.S. automobile parts supplier base has been a
decades-long trend. In 1998 the New York Times reported that from
1978-1998 GM's Delphi division had built over 50 manufacturing
plants in Mexico. A major factor listed for the shift of parts
assembly was lower costs (derived from lower labor costs), with some
U.S. workers earning $22 an hour in 1998 being replaced by Mexican
workers earning $1 to $2 an hour. Sam Dillon, A 20-Year G.M. Parts
Migration To Mexico, New York Times, Jun. 24, 1998, <a href="https://www.nytimes.com/1998/06/24/business/international-business-a-20-year-gm-parts-migration-to-mexico.html">https://www.nytimes.com/1998/06/24/business/international-business-a-20-year-gm-parts-migration-to-mexico.html</a>. In 2006, Delphi announced
the closing or sale of 21 out of 29 of its U.S. automobile parts
plants, with new operations being announced in Mexico and China.
Kate Lithicum, A tale of two cities: What happened when factory jobs
moved from Warren, Ohio, to Juarez, Mexico, Los Angeles Times, Feb.
17, 2017, <a href="http://www.latimes.com/world/mexico-americas/la-fg-mexico-us-factories-20170217-htmlstory.html">http://www.latimes.com/world/mexico-americas/la-fg-mexico-us-factories-20170217-htmlstory.html</a>. In 2007, TRW's Chief
Operations Officer discussed in an interview the firm's ongoing
plans to shift production to low-cost countries. At that time 37-38
percent of the firm's operations were in low cost countries, but TRW
had a five-year plan to move to 50 percent sourcing from those
countries. Douglas Bolduc, TRW Plan: Buy More Parts from Low-Cost
Countries, Automotive News, May 21, 2007, <a href="http://www.autonews.com/article/20070521/SUB/70516021/trw-plan%3A-buy-more-parts-from-low-cost-countries">http://www.autonews.com/article/20070521/SUB/70516021/trw-plan%3A-buy-more-parts-from-low-cost-countries</a>. By 2013, Automotive News reported seven of the
largest North American automobile parts suppliers were expanding
their operations in Mexico. China was also listed by the large
supplier companies as a key destination for new operations. David
Sedgewick, Global Industry Craves Megasuppliers, Automotive News,
Jun. 17, 2013, <a href="https://www.autonews.com/assets/PDF/CA89220617.PDF">https://www.autonews.com/assets/PDF/CA89220617.PDF</a>.
---------------------------------------------------------------------------
C. Domestic Manufacturing and Domestic R&D in Technologies for Engines,
Transmissions, and Electrical Components Are Necessary for National
Security
As previously noted, the automotive industry is a key driver of
innovation for the U.S. military and develops state-of-the-art
technologies, from autonomous vehicles equipped with navigation systems
that enable them to maneuver over dangerous terrain to lighter and more
powerful fuel-efficient vehicles. Given that many of the technological
advancements in military vehicle connectivity, electrification,
lightweighting, and autonomous driving are first developed through R&D
in the commercial automotive sector in the United States, it is
imperative that related R&D remain within the United States, be
conducted by American-owned firms, and that the United States
Government take measures to secure the long-term viability of domestic
R&D in the automotive sector.
As a general matter, it is well understood that globalization of
the automobile sector has decentralized production such that decoupling
R&D from manufacturing has become possible, allowing producers to seek
manufacturing investments in areas where production costs are lowest
and to focus R&D investments in locations where specific technological
progress is being made.\136\ To the extent R&D is removed from
manufacturing, it occurs in areas where technology has matured, the
value of integrating product design with manufacturing is low, and the
product has little bearing on national security. On the other hand,
manufacturers tend to locate R&D in close proximity to manufacturing
facilities when the technology is emerging or product-specific.\137\
---------------------------------------------------------------------------
\136\ Global Location Strategy for Automotive Suppliers, KPMG
International, Feb. 21, 2009, <a href="https://www.kpmg.de/docs/Global_Location.pdf">https://www.kpmg.de/docs/Global_Location.pdf</a>.
\137\ See Gary P. Pisano and Willy C. Shih, Does America Really
Need Manufacturing, Harvard Business Review, March 2012, <a href="https://hbr.org/2012/03/does-america-really-need-manufacturing">https://hbr.org/2012/03/does-america-really-need-manufacturing</a>; The
Proximity of Manufacturing Increases the Rate of R&D Efficiencies,
Aalto University, Mar. 15, 2017, <a href="https://phys.org/news/2017-03-proximity-efficiencies.html">https://phys.org/news/2017-03-proximity-efficiencies.html</a>.
---------------------------------------------------------------------------
Further, where technology is important to product innovation and
R&D directly impacts national security capabilities, it is essential
that R&D remain in each producer's home country, so as to minimize
knowledge and innovation outflows that could undermine a nation's
competitive advantage.\138\ In the automotive sector, co-locating the
manufacture of automobiles and automobile parts with related R&D
increases the rate of efficiency in the adoption of technological
gains. Advancements in vehicle lightweighting, connectivity,
electrification and autonomous driving require highly specialized and
innovative manufacturing processes, such that R&D is optimized when
located in close proximity to manufacturing facilities.\139\ As
complexities in product design increase and the market demands faster
innovation, R&D proximity facilitates the rapid development of product
life cycles and gives manufacturers sufficient flexibility to capture
R&D breakthroughs.\140\ For technologically advanced products, ``even
minor changes in the [manufacturing] process can have a huge impact on
the product, the value of closely integrating manufacturing and R&D is
high, and the
[[Page 62067]]
risks of separating them are enormous.'' \141\
---------------------------------------------------------------------------
\138\ Id.; Juan Alcacer and Minyuan Zhao, Local R&D Strategies
and Multi-Location Firms: The Role of Internal Linkages, Harvard
Business School Working Paper, 2010, <a href="https://www.hbs.edu/faculty/Publication%20Files/10-064.pdf">https://www.hbs.edu/faculty/Publication%20Files/10-064.pdf</a>.
\139\ Supra n. 137.
\140\ European Commission, Study on the Relationship Between the
Localisation of production, R&D and Innovation Activities, Final
Report ENTR/90/PP/2011/FC, Sep. 2014, <a href="http://ec.europa.eu/DocsRoom/documents/6958/attachments/1/translations/en/renditions/native">http://ec.europa.eu/DocsRoom/documents/6958/attachments/1/translations/en/renditions/native</a> at
30, 50.
\141\ Supra n. 137.
---------------------------------------------------------------------------
Moreover, it is important that R&D be conducted by American-owned
firms in the United States, given the national security implications of
advanced vehicle technologies with military applications. Indeed, all
major automobile-producing countries utilize export control laws to
restrict the transfer of military technologies to foreign entities,
whether within or outside their domestic borders, which means that the
United States may not be able to rely on technologies developed in
allied countries to give its military a competitive edge. Even for R&D
conducted in the United States, it is important that the R&D be
conducted by American-owned firms to reduce reliance on foreign-owned
companies' domestic R&D investments and ensure access in time of
national emergency to the necessary intellectual property (``IP'').
Although the DOD utilizes R&D conducted by U.S. operations of foreign-
owned firms, this R&D may not be available in a time of national
crisis. Indeed, foreign-owned manufacturers are unlikely to share
cutting-edge IP with their American competitors, especially
technologies in which they have invested billions of dollars for
commercial reasons. Further, in a time of war (or other crisis) their
home governments may also prevent them from providing DOD with access
to innovative technologies.
The interdependence between domestic manufacturing and American-
owned R&D explains precisely why imports of automobile parts pose a
threat to U.S. national security. Dependence on imports over time leads
to the loss of domestic manufacturing competence and related R&D, and
therefore the deterioration of the ability to lead advancements in
innovation that are important for military needs.
1. The U.S. Military Relies on the Domestic Automotive Sector for
Technological Advancements
According to the DOD, technological advancements in U.S. military
automotive programs are driven by domestic innovations in engine,
transmission and electrical component technologies, and the U.S.
military relies on rapid application of U.S. commercial breakthroughs
to gain competitive military advantages.\142\ For example, the National
Advanced Mobility Consortium (NAMC) recently awarded a $47 million
contract to Cummins and Achates Power to develop a supercharged turbo
diesel engine for the Bradley and Next Generation Combat Vehicle under
the Advanced Combat Engine (``ACE'') program.\143\ This program builds
on the 60 years of experience that Cummins Diesel has manufacturing
commercial turbo diesel engines.\144\ It also provides an opportunity
for the commercial supplier to incorporate technologies that focus on
military specifications such as engine thermal management, power
density, and fuel efficiency into commercial automobiles.
---------------------------------------------------------------------------
\142\ The Department of Commerce's consultations with Department
of Defense.
\143\ Kylie Veleta, Cummins to Design Combat Engines That Elude
the Enemy, Inside Indiana Business with Gerry Dick, Feb. 15, 2018,
<a href="http://www.insideindianabusiness.com/story/37513588/cummins-to-design-combat-engines-that-elude-the-enemy">http://www.insideindianabusiness.com/story/37513588/cummins-to-design-combat-engines-that-elude-the-enemy</a>.
\144\ Cummins, ``Holset Turbo Technologies, Innovative
Engineering, Absolute Reliability,'' <a href="https://www.cummins.com/components/holset-turbo-technologies">https://www.cummins.com/components/holset-turbo-technologies</a>.
---------------------------------------------------------------------------
Likewise, the U.S. military is exploring power options such as
hybrid electric engines and hydrogen fuel cells, finding that quiet new
engine designs promise additional military benefits beyond
breakthroughs in fuel consumption, range and reliability. The U.S.
military has long sought to reduce its dependence on fossil fuels to
lower costs and the risks associated with producing and transporting
combustible fuels through war zones.\145\ Accordingly, the U.S.
military has been exploring hybrid electric drive systems that combine
an electric drive with a combustion engine for greater efficiency.
These technologies have been the subject of years of effort and
billions of dollars of research by the passenger vehicle industry.
Engines, both gas and electric, and the drivetrain parts required to
integrate them into an efficient combination, are all critical
automobile parts technologies that must be retained for both R&D and
production in the United States.
---------------------------------------------------------------------------
\145\ The Department of Commerce's consultations with Department
of Defense.
---------------------------------------------------------------------------
In fuel cells, General Motors Global Fuel Cells Activities Division
is working with the U.S. Army Tank Automotive Research, Development and
Engineering Center (``TARDEC'') \146\ to develop a hydrogen fuel cell-
powered light-duty utility truck (``ZH2''). This vehicle, based on a
Chevy Colorado light truck design, is powered by a fuel cell and a
battery that has near silent operation, gives off less heat, and
provides water as a by-product for use in the field. This work builds
on GM's fuel cell experience via their Project Driveway, a 119-vehicle
fleet driven by more than 5,000 people in a multi-year fuel cell
experience program accumulating 3.1 million miles of hydrogen fuel cell
testing. The Army is in the process of evaluating the truck for
potential use in military operations.\147\
---------------------------------------------------------------------------
\146\ The U.S. Army Tank Automotive Research, Development and
Engineering Center's (TARDEC) mission is to ``develop, integrate and
sustain the right technology solutions for all manned and unmanned
Department of Defense (DoD) ground systems and combat support
systems to improve Current Force effectiveness and provide superior
capabilities for the Future Force,'' <a href="https://tardec.army.mil/#content/4">https://tardec.army.mil/#content/4</a>.
\147\ Mission-Ready Chevrolet Colorado ZH2 Fuel Cell Vehicle
Breaks Cover at U.S. Army Show, Modified Midsize Pickup Goes into
Extreme Military Field Testing in 2017, GM Corporate Newsroom, Oct.
3, 2016, <a href="https://media.gm.com/media/us/en/gm/news.detail.html/content/Pages/news/us/en/2016/oct/1003-zh2.html">https://media.gm.com/media/us/en/gm/news.detail.html/content/Pages/news/us/en/2016/oct/1003-zh2.html</a>.
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Along with engines, transmission technology is also critical to
military vehicles. For example, the Advanced Vehicle Power and
Technology Alliance (``AVPT''), which aligns experts from the U.S.
Department of Energy and the Department of the Army, has specifically
identified advanced combustion engines and transmissions as products of
special interest for collaboration.\148\ The U.S. military has found it
challenging to source transmissions with sufficient performance
capabilities for the extreme demands and conditions under which
military vehicles must operate.\149\ Transmissions for modern military
vehicles must be engineered to adapt and operate efficiently, offering
peak performance in wheeled military applications. Military
transmissions must reliably deliver precise propulsion control, high
productivity and efficiency, and reliable operation. The U.S.
commercial automotive industry has made significant progress in these
performance capabilities, and adaptation of advancements in automotive
transmission technology for military applications is common. Indeed,
the U.S. automotive industry's move away from manual to automatic
transmissions has been closely followed by the military, with automatic
transmissions now routinely incorporated in military tactical vehicles.
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\148\ Chris Williams, DoE, Army Alliance Underlines Achieving
Energy Security, Tank Automotive Research, Development and
Engineering Center, Aug. 1, 2011, <a href="https://www.army.mil/article/62727/doe_army_alliance_underlines_achieving_energy_security">https://www.army.mil/article/62727/doe_army_alliance_underlines_achieving_energy_security</a>.
\149\ John Tasdemir, Ground Vehicle Systems Engineering and
Technology Symposium, GVPM Powertrain Overview, Aug. 11, 2011,
<a href="http://www.dtic.mil/dtic/tr/fulltext/u2/a547261.pdf">http://www.dtic.mil/dtic/tr/fulltext/u2/a547261.pdf</a>.
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Similarly, the DOD's TARDEC has evaluated various suppliers
including
[[Page 62068]]
Allison, L3, and SAPA \150\ to provide steering transmissions to
support the next generation Bradley Fighting Vehicle.\151\ The goal of
the Advanced Powertrain Initiative is to test the performance of a 32-
speed transmission. Although defense is the dominant market for these
steering transmissions, the next generation transmission depends on
innovation developed in standard transmissions and steering
transmissions used in the commercial sector. Many suppliers supporting
defense applications in this segment participate in commercial
activity, including:
---------------------------------------------------------------------------
\150\ Allison, L3, and SAPA are leading global suppliers of
transmissions, other automobile parts and defense technologies.
\151\ Ashley Tressel, Race to replace Bradley transmissions
stirs up defense industrial base issues, Inside Defense, June 22,
2018, <a href="https://insidedefense.com/share/196943">https://insidedefense.com/share/196943</a>. A foreign-owned
supplier won this competition, indicating the needs to better
support the competitiveness of American-owned manufacturers.
<bullet> First tier suppliers: Allison, L3, Twin Disc, General
Engine Products
<bullet> Sub-tier commercial suppliers for transmissions and
transmission components: ZF Friedrichshafen AG*, Valeo SA*, BorgWarner,
Inc., GKN Driveline*, JATCO*, Linamar Corp.*, Schaeffler Group USA
Inc.*, Brose North America, Inc.*, Powertech America, Inc.*, NSK
Americas*, Johnson Electrics*
* The supplier is a U.S. affiliate of a foreign-owned parent.
Similarly, electrical equipment is critical for military vehicles.
There is a large overlap in the commercial automobile control/
electronics systems and the connectivity systems that are being
incorporated into military vehicles. Network technology is now embedded
in every new civilian vehicle, and military vehicles are increasingly
becoming more network intensive. Military vehicles now routinely
utilize the Controller Area Network (``CAN'') technology developed for
the commercial vehicle world, which allows remote monitoring of the
vehicle's performance and need for maintenance. Military vehicles are
also connected to operational or mission networks that link vehicle
computers, data links, radios, vision, and navigation systems directly
involved in missions. These networks are similar in nature to advanced
connected networks that are now routinely available in new passenger
cars and trucks.\152\
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\152\ Richard Wilson, Military Vehicles in High Speed Data
Connection,'' <a href="http://ElectronicsWeekly.com">ElectronicsWeekly.com</a>, May 21, 2013, <a href="https://www.electronicsweekly.com/market-sectors/military-aerospace-electronics/military-vehicles-in-high-speed-data-connection-2013-05/">https://www.electronicsweekly.com/market-sectors/military-aerospace-electronics/military-vehicles-in-high-speed-data-connection-2013-05/</a>.
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Further, semiconductors are vital to U.S. national security as they
power many of the high-tech systems used by the U.S. military,\153\
including field communications, transportation systems, and various
weapon systems and platforms.\154\ Specific and unique U.S. military
semiconductor requirements include radiation-hardened semiconductors
for satellites and space operations, high performance converters for
radio frequency communication systems, special processors for radar
systems, and advanced imagers.\155\ As with the transmission sector,
there are many suppliers that overlap with the commercial sector,
including:
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\153\ Michaela D. Platzer and John F. Sargent Jr., U.S.
Semiconductor Manufacturing: Industry Trends, Global Competition,
Federal Policy, Congressional research Service, Jun. 27, 2016,
<a href="https://fas.org/sgp/crs/misc/R44544.pdf">https://fas.org/sgp/crs/misc/R44544.pdf</a> at 21; Brig. Gen. John
Adams, America's Semiconductors Supply Chain Faces Big Cybersecurity
Risks, Alliance for American Manufacturing Blog, Mar. 23, 2017,
<a href="http://www.americanmanufacturing.org/blog/entry/americas-semiconductors-supply-chain-faces-big-cybersecurity-risks">http://www.americanmanufacturing.org/blog/entry/americas-semiconductors-supply-chain-faces-big-cybersecurity-risks</a>. See also
Falan Yinug, How U.S. Semiconductor Technology Strengthens Our
Military on the Battlefield, Semiconductor Industry Association
Blog, Jan. 26, 2016, <a href="http://blog.semiconductors.org/blog/how-us-semiconductor-technology-strengthens-our-military-on-the-battlefield">http://blog.semiconductors.org/blog/how-us-semiconductor-technology-strengthens-our-military-on-the-battlefield</a>.
\154\ Dave Chesebrough, Trusted Microelectronics: A Critical
Defense Need, National Defense, Oct. 31, 2017, <a href="http://www.nationaldefensemagazine.org/articles/2017/10/31/trusted-microelectronics-a-critical-defense-need">http://www.nationaldefensemagazine.org/articles/2017/10/31/trusted-microelectronics-a-critical-defense-need</a>.
\155\ For example, semiconductors are key to the land-based
weapons system that the United States uses to defend airspace
against aircraft, cruise missiles, drones, and ballistic missiles.
Joe Pappalardo, How Patriot Missiles Will Stay a Step Ahead of the
Enemy, Popular Mechanics, Aug. 27, 2015, <a href="https://www.popularmechanics.com/military/research/a17100/patriot-missiles-radar-gallium-nitride/">https://www.popularmechanics.com/military/research/a17100/patriot-missiles-radar-gallium-nitride/</a>; NDIA Trusted Microelectronics Joint Working
Group, Future Needs & System Impact of Microelectronics
Technologies, Jul. 2017, <a href="https://www.intrinsix.com/hubfs/Premium_Content/trusted-asic-design/Future_Needs_and_System_Impact_of_Microelectronics_Technologies.pdf">https://www.intrinsix.com/hubfs/Premium_Content/trusted-asic-design/Future_Needs_and_System_Impact_of_Microelectronics_Technologies.pdf</a>.
<bullet> First tier suppliers: Harris, Telephonics Corporation,
DRS*, Rockwell Collins.
<bullet> General suppliers of semiconductors: Intel, Micron,
Qualcomm, AMD, Applied Materials, Cadence, Synopsys.\156\
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\156\ Electronic systems for automotive purposes account for 9
percent of total global electronic system production (2017
estimate), after communications, computer, industrial/medical/other,
and consumer purposes. This is significant for semiconductor
suppliers, as their products are required for many of these
automotive systems. Automotive Electronic Systems Growth Strongest
Through 2021, IC Insights, Nov. 8, 2017, <a href="http://www.icinsights.com/news/bulletins/Automotive-Electronic-Systems-Growth-Strongest-Through-2021/">http://www.icinsights.com/news/bulletins/Automotive-Electronic-Systems-Growth-Strongest-Through-2021/</a>.
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<bullet> Sub-tier commercial suppliers for communication systems/
components to North America: Denso International America Inc.*
<bullet> Sub-tier commercial suppliers for navigation system/
components to North America: Panasonic Automotive Systems Co. of
America*, Mitsubishi Electric Automotive America Inc.*, Alpine
Electronics of America Inc.*, Pioneer Automotive Technologies Inc.*
<bullet> Sub-tier commercial suppliers for sensors to North
America: Panasonic Automotive Systems Co. of America*, Valeo Inc.*,
Flex Ltd.*, Infineon Technologies North America Corp.*, Stoneridge Inc.
<bullet> Sub-tier commercial suppliers for electronics to North
America: Continental Automotive Systems U.S. Inc. (safety and
powertrain)*, Robert Bosch (electrical devices, electronics & steering
systems)*, Aisin World Corp. of America (electronics)*, Hyundai Mobis
(electronics)*, Autoliv North America (safety electronics)*, Sumitomo
Electric Wiring Systems Inc. (electronics systems)*, Yanfeng Automotive
Interiors (electronics)*, Brose North America Inc. (electronics)*,
Magneti Marelli Holding USA (electronics)*, Eberspaecher North America
Inc. (electronics)*.
* The supplier is a U.S. affiliate of a foreign-owned parent.
In addition to providing unique product development and performance
enhancements for key products such as engines, transmissions and
electrical components, the U.S. defense sector relies on the automotive
industry more broadly. The automotive sector provides unique innovation
to the defense sector in various areas, including manufacturing
processes, R&D, and use of new materials.
Importantly, the defense industrial base is also dependent on the
commercial scale of the automotive sector for critical commodities and
capabilities.\157\ Yet, the continued offshoring of key automotive
manufacturing and resulting loss of scale to support U.S. operations
leaves the military at risk of not having supply chains in the United
States for critical equipment. Additionally, the military relies not
only on technology and innovations from the U.S. automobile industry,
but also on the technical skills and know-how of its workforce as the
commercial sector is a key recruiting ground for defense industry
manufacturers.\158\
---------------------------------------------------------------------------
\157\ The Department of Commerce's consultations with Department
of Defense.
\158\ Id.
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The broad-scale overlap between commercial and defense R&D
activities underscores the interdependence between the commercial
automobile industry and the military sector:
[[Page 62069]]
<bullet> The DOD partners with the commercial automotive sector to
conduct pre-competitive research in areas that ultimately prove to have
commercial and defense applications. For example, the DOD is a partner
in LIFT (Lightweight Innovations for Tomorrow, an industry-led,
government-funded consortium), along with General Dynamics and the
Original Equipment Supplier Association, which represents commercial
automobile parts suppliers. LIFT is ``part of a national network of
research institutions and industrial companies geared toward advancing
America's leadership in manufacturing technology.'' \159\
---------------------------------------------------------------------------
\159\ LIFT, Manufacturing USA, <a href="https://lift.technology/manufacturingusa/">https://lift.technology/manufacturingusa/</a>.
---------------------------------------------------------------------------
<bullet> University Centers of Excellence (``COEs'') seek to expand
the frontiers of knowledge in research areas where the Army has
enduring needs. COEs couple state-of-the-art research programs at
academic institutions with broad-based graduate education programs to
help increase the supply of scientists and engineers in automotive and
rotary wing technology.\160\
---------------------------------------------------------------------------
\160\ John F. Sargent Jr., Defense Science and Technology
Funding, Library of Congress, Congressional Research Service,
R45110, Feb. 21, 2018, <a href="https://crsreports.congress.gov/product/pdf/R/R45110">https://crsreports.congress.gov/product/pdf/R/R45110</a>.
---------------------------------------------------------------------------
<bullet> DOD's TARDEC \161\ and GM have enjoyed a successful fuel
cell-focused collaborative research relationship for years, beginning
with a Cooperative Research and Development Agreement to test fuel cell
stacks. This relationship grew through the development of the Chevrolet
Colorado ZH2 light truck, which debuted in 2016 and was tested and
demonstrated by the U.S. Army over the next year. GM presented SURUS (a
hydrogen fuel cell vehicle) in 2017 at the annual meeting of the
Association of the United States Army.\162\
---------------------------------------------------------------------------
\161\ TARDEC, <a href="https://tardec.army.mil/">https://tardec.army.mil/</a>.
\162\ Douglas Halleaux, TARDEC, GM bring SURUS to Smithsonian
and SOFIC, Defense Visual Information Distribution Service, U.S.
Army Tank Automotive Research Development & Engineering Center,
<a href="https://www.dvidshub.net/news/277762/tardec-gm-bring-surus-smithsonian-and-sofic">https://www.dvidshub.net/news/277762/tardec-gm-bring-surus-smithsonian-and-sofic</a>.
---------------------------------------------------------------------------
<bullet> The Automotive Research Center, a U.S. Army Center of
Excellence for Modeling and Simulation of Ground Vehicles led by the
University of Michigan, partners with the following government and
private sector entities for R&D advancements:\163\
---------------------------------------------------------------------------
\163\ Automotive Research Center, Industry Partners, <a href="http://arc.engin.umich.edu/about/industry-partners.html">http://arc.engin.umich.edu/about/industry-partners.html</a>.
------------------------------------------------------------------------
------------------------------------------------------------------------
Ansys, Inc.................. *AVL North America, BAE Systems.
Inc.
* Ballard Power Systems, Inc * BETA CAE Systems Boeing Research and
USA. Technology.
* Robert Bosch.............. Caterpillar......... * Daimler.
Detroit Diesel Corporation.. * FEV Group......... * Fiat Chrysler.
Ford Motor Company.......... General Dynamics GE Global Research.
Land Systems.
General Motors Corporation.. * HBM nCode......... * Henkel North
America.
Quantum Signal LLC.......... RAMDO Solutions..... * Rolls-Royce North
America.
Soar Technology............. * Ultra AMI......... * Yokohama Rubber,
Inc.
Argonne National Lab........ Army Research Lab... Cold Regions Test
Center.
Environmental Protection National Aeronautics National Institute
Agency (EPA). and Space of Standards and
Administration Technology, U.S.
(NASA) Jet Department of
Propulsion Lab. Commerce.
National Renewable Energy Oak Ridge National
Lab. Lab.
------------------------------------------------------------------------
* The supplier is a U.S. affiliate of a foreign-owned parent.
These examples illustrate the intense level of cooperation between
the commercial and military vehicle sectors and the importance of
commercial R&D spending in the United States that supports U.S.
military leadership.
Finally, while the U.S. military presently benefits from R&D
investments by both American-owned and foreign-owned companies in the
United States, it is important to underscore that, in the time of
national emergency, foreign-owned subsidiaries may not be willing or
able to continue their R&D collaboration with the U.S. Government. Nor
would it be logical to expect foreign R&D enterprises in the United
States to share their research and patented technology with American-
owned competitors. It is for this reason that innovation by American-
owned firms is essential to U.S. national security and, as explained in
the following section, the overall weakening of the United States'
automotive industry adversely impacts American-owned firm's ability to
invest in R&D in order to maintain leadership in technologies that have
important military applications.
2. Growth of American-Owned R&D for Critical Automobile Parts Is
Essential To Strengthen U.S. National Security
The 2018 U.S. National Defense Strategy explicitly states that
``[n]ew commercial technology will change . . . the character of war''
and that ``many technological developments will come from the
commercial sector.'' \164\ In describing necessary tactics to solidify
the U.S. military's competitive advantage, the National Defense
Strategy emphasizes that the DOD must invest broadly in the ``rapid
application'' of commercial breakthroughs.\165\ Comparing the [TEXT
REDACTED] establishes the importance of maintaining a robust automotive
R&D presence in the United States. In 2017, foreign- and American-owned
automobile producers spent [TEXT REDACTED] on R&D in the United States,
with American-owned producers accounting for [TEXT REDACTED] of that
total, compared to [TEXT REDACTED] spent on R&D by armored vehicle
producers.\166\ [TEXT REDACTED].\167\ Therefore, U.S. armored vehicle
producers, and by extension the U.S. military, depend on the continued
U.S. leadership and innovation of the commercial automotive sector.
---------------------------------------------------------------------------
\164\ Department of Defense, Summary of the 2018 National
Defense Strategy of the United States of America, Jan. 2018, <a href="https://dod.defense.gov/Portals/1/Documents/pubs/2018-National-Defense-Strategy-Summary.pdf">https://dod.defense.gov/Portals/1/Documents/pubs/2018-National-Defense-Strategy-Summary.pdf</a> at 3.
\165\ Id. at 7.
\166\ U.S. Producers' Survey Responses, Question 10a.
\167\ Id.
---------------------------------------------------------------------------
Given the importance of automobile engines, transmissions and
electrical systems to technological advancements in military
transportation vehicles, and given the importance of co-locating R&D
and manufacturing for these technologies, it is imperative that the
United States maintain and grow a robust commercial automobile and
automobile parts industry. Designing and producing automobile parts is
a massive engineering challenge, which is why automobile producers
globally continue to increase spending on R&D. An automobile purchased
today is the product of years of R&D investments. Typically, it takes
five years or more for
[[Page 62070]]
a technology or a new vehicle model to go from design to testing to
production and sale. Today's high-tech vehicle is comprised of as many
as 15,000 parts all performing specialized functions in carefully
designed ways.\168\ The stakes for keeping pace on the development of
technologically advanced and efficient engines, advanced powertrains,
and better sensors are intense, and the advent of new technologies is
forcing companies to augment R&D spending to remain competitive. The
long lead-times for bringing technology to market and a reliance on
imported automobile parts increases the vulnerability of the United
States.
---------------------------------------------------------------------------
\168\ American Automotive Policy Council, State of the U.S.
Automotive Industry 2018, Aug. 2018, <a href="http://www.americanautocouncil.org/sites/aapc2016/files/2018%20Economic%20Contribution%20Report.pdf">http://www.americanautocouncil.org/sites/aapc2016/files/2018%20Economic%20Contribution%20Report.pdf</a> at 7.
---------------------------------------------------------------------------
As most automotive R&D is focused on new vehicle design and
testing, significant money is spent on the development of engines,
transmissions, and electrical equipment technologies that have national
security applications. Yet American-owned automobile producers have
lagged behind their foreign counterparts in automotive R&D spending.
Table 13 shows that, in 2017, American-owned producers represented 20
percent of global R&D spending in automobile production and seven
percent of global R&D spending in automobile parts, trailing behind the
EU and Japanese producers, which together controlled approximately 70
percent of global R&D spending in automobile production and nearly 90
percent in automobile parts R&D.\169\ For American-owned firms,
approximately [TEXT REDACTED].\170\ For EU- and Japanese-owned firms,
most R&D investments are made in their home countries.\171\
---------------------------------------------------------------------------
\169\ PwC, 2017 Global Innovation 1000 Study, 2018, <a href="https://www.strategyand.pwc.com/innovation1000#VisualTabs3">https://www.strategyand.pwc.com/innovation1000#VisualTabs3</a>.
\170\ U.S. Producers' Survey Responses, Question 10a.
\171\ Stefan Di Bitonto, The Automotive Industry in Germany,
Germany Trade & Invest, 2018, <a href="https://www.gtai.de/GTAI/Content/EN/Invest/_SharedDocs/Downloads/GTAI/Industry-overviews/industry-overview-automotive-industry-en.pdf">https://www.gtai.de/GTAI/Content/EN/Invest/_SharedDocs/Downloads/GTAI/Industry-overviews/industry-overview-automotive-industry-en.pdf</a>; see Toyota Motor Company annual
report, March 31, 2018, <a href="https://www.toyota-global.com/pages/contents/investors/ir_library/annual/pdf/2018/annual_report_2018_fie.pdf">https://www.toyota-global.com/pages/contents/investors/ir_library/annual/pdf/2018/annual_report_2018_fie.pdf</a> at 46.
[GRAPHIC] [TIFF OMITTED] TN08NO21.063
Table 14 below shows that, when global R&D is measured in relation
to automobiles produced, American-owned manufacturers outspent their EU
and Japanese counterparts ($1,543 by American-owned firms compared to
$1,480 by EU firms, and $1,009 by Japanese firms).\172\ However, this
increased R&D spending per-unit highlights the impact of market share
lost to automotive imports, namely that American-owned firms need to
have higher per-unit R&D expenditures relative to their foreign-owned
competitors in order to offset the economic impacts of lost market
share. The reduced market share leads to a vicious cycle, with smaller
production volumes reducing profits, which reduces funds to support
overall R&D, which reduces innovation and leads to further losses of
market share. China, which has the lowest per-unit R&D expenditure,
often conducts R&D through joint ventures with foreign companies,
lowering the amount of R&D that needs to be performed by Chinese
companies. Additionally, Chinese companies are able to amortize their
R&D costs over a large production base.
---------------------------------------------------------------------------
\172\ PwC, 2017 Global Innovation 1000 Study, supra.
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[[Page 62071]]
[GRAPHIC] [TIFF OMITTED] TN08NO21.064
[[Page 62072]]
The smaller production volume of American-owned manufacturers
relative to global competitors hinders American manufacturers' ability
to invest in R&D to the same extent as their competitors. Production
must increase in order to encourage additional R&D investments, as
[TEXT REDACTED].\173\
---------------------------------------------------------------------------
\173\ U.S. Producers' Survey Responses, Questions 2b and 10.
---------------------------------------------------------------------------
It is necessary and appropriate to focus on increased American-
owned production because, with respect to the specific automotive
technologies that are important for national security, American-owned
producers invest R&D dollars domestically, whereas foreign-owned
producers tend to invest abroad. To illustrate, in 2017 with respect to
spending in the United States, [TEXT REDACTED].\174\ [TEXT
REDACTED].\175\ [TEXT REDACTED].\176\ As shown in Table 15 [TEXT
REDACTED] are the most common non-U.S. locations for foreign-owned
producers' R&D investments related to vehicle autonomy, connectivity,
electrification, and lightweighting.\177\
---------------------------------------------------------------------------
\174\ U.S. Producers' Survey Responses, Question 10a.
\175\ Id.
\176\ Id.
\177\ U.S. Producers' Survey Responses, Question 10b.
[GRAPHIC] [TIFF OMITTED] TN08NO21.065
Increasing the United States' overall share of global R&D
investments is essential to national security. Industry analysts expect
that by 2023 about $255 billion in R&D and capital expenditures will
have been spent globally on electric vehicles.\178\ An additional $61
billion will be spent on autonomous vehicle technologies by the same
year.\179\ As advanced automotive technologies become a battleground
for the industry, R&D budgets will determine how effectively automobile
producers can compete and which nations will control cutting-edge
technologies for both commercial and military applications.\180\
---------------------------------------------------------------------------
\178\ Irwin, EV, AV Spending in Slowing Market Points to `Pile
Up,' supra.
\179\ Id.
\180\ For example, Toyota recently announced that it will invest
a record 1.08 trillion Yen in 2018 to expedite the development of
autonomous driving technology, connected cars and electric vehicles,
representing a 30% increase from five years earlier. Toyota pours
$22bn into R&D as Apple and Google Close in, Nikkei Asian Review,
May 10, 2018, <a href="https://asia.nikkei.com/Business/Companies/Toyota-pours-22bn-into-R-D-as-Apple-and-Google-close-in">https://asia.nikkei.com/Business/Companies/Toyota-pours-22bn-into-R-D-as-Apple-and-Google-close-in</a>. Ford also recently
announced that it will significantly increase its planned
investments in electric vehicles to $11 billion by 2022 and have 40
hybrid and fully electric vehicles in its model lineup. The
investment figure is sharply higher than Ford's previously announced
target of $4.5 billion by 2020 and is mostly derived from the costs
of developing dedicated electric vehicle architectures. Ford Plans
to Invest $11 Billion to Electrify Its 'Most Iconic' Vehicles,
Fortune, Jan. 15, 2018, <a href="http://fortune.com/2018/01/14/ford-11-billion-electric-car-investment/">http://fortune.com/2018/01/14/ford-11-billion-electric-car-investment/</a>. And, according to BMW's 2017-18
annual report, the company planned to allocate between 6.5 and 7
percent of its 2018 gross revenue to R&D, above its usual range of 5
to 5.5 percent. BMW to Spend Record Amount on R&D to Prepare for
Electric Cars, Self-Driving Cars, Assembly Magazine, Mar. 23, 2018,
<a href="https://www.assemblymag.com/articles/94194-bmw-to-spend-record-amount-on-rd-to-prepare-for-electric-cars-self-driving-cars">https://www.assemblymag.com/articles/94194-bmw-to-spend-record-amount-on-rd-to-prepare-for-electric-cars-self-driving-cars</a>.
---------------------------------------------------------------------------
The pressure for R&D spending is so great that unprecedented sums
of money are being poured into electric and autonomous vehicles years
before those technologies are fully cost-competitive in the
market.\181\ For American-owned and foreign-owned producers in the
United States, U.S. R&D activities are [TEXT REDACTED].\182\
---------------------------------------------------------------------------
\181\ Irwin, EV, AV Spending in Slowing Market Points to `Pile
Up,' supra.
\182\ U.S. Producers' Survey Responses, Question 10.
---------------------------------------------------------------------------
PwC's 2015 Global Innovation 1000 Automotive Industry Findings
examined in detail the regional locations where automotive companies
are conducting R&D and concluded that the automotive industry's
fastest-growing and most competitive markets are now in the Asia
Pacific region, dominated by China as the world's largest automobile
market.\183\ Even more noteworthy, the study, which examined R&D
spending by location rather than by where companies were headquartered,
concluded that the Asia Pacific region is increasingly where automotive
innovation is concentrated.\184\ From 2007 to 2015, expenditures on
automotive R&D conducted in Asia increased by 70 percent, surpassing
North America and Europe to become the largest regional hub of such
expenditures.\185\ During the same period, North American automotive
R&D expenditures only increased by 23 percent.\186\
---------------------------------------------------------------------------
\183\ PwC, 2015 Global Innovation 1000 Automotive Industry
Findings, 2016, <a href="https://www.strategyand.pwc.com/media/file/Innnovation-1000-2015-Auto-industry-findings-infographic.pdf">https://www.strategyand.pwc.com/media/file/Innnovation-1000-2015-Auto-industry-findings-infographic.pdf</a>.
\184\ Id.
\185\ Id.
\186\ Id.
---------------------------------------------------------------------------
The PwC study also found that China's share of total automotive R&D
[[Page 62073]]
had jumped dramatically from 4 percent in 2007 to 11 percent in 2015.
During that same period, the U.S. share of total automotive R&D
spending dropped from 29 percent to 27 percent.\187\ China also
replaced Germany as the second-largest importer of automotive R&D
during this period.\188\ According to PwC, this data reflects the shift
happening in the automotive industry's center of gravity.\189\ PwC's
2017 Global Innovation 1000 Study highlights the impact of this trend,
showing that of the top 20 automobile producers ranked in terms of R&D
expenditures, 11 are headquartered in Asia and six are headquartered in
Europe, while only 3 are headquartered in the United States (GM, Ford,
and Tesla).\190\
---------------------------------------------------------------------------
\187\ Id.
\188\ Id. Imported R&D refers to R&D conducted in China by
companies headquartered abroad.
\189\ Id.
\190\ PwC, The 2017 Global Innovation 1000 Study, supra.
---------------------------------------------------------------------------
Further, none of the top 10 automobile parts suppliers in terms of
overall R&D expenditures is headquartered in the United States, while
four are headquartered in Asia and the remaining six are headquartered
in Europe.\191\ This is problematic for the national security of the
United States because the automotive industry is highly dependent on
suppliers for components as well as leading-edge technological
development. While U.S. automobile companies direct billions of dollars
in R&D activities, this research is increasingly conducted by partner
supplier companies. In fact, automobile parts manufacturers conduct
about one[hyphen]third of the annual $18 billion investment by the
automotive industry in R&D in the United States.\192\ Most automobile
producers [TEXT REDACTED].\193\
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\191\ Id.
\192\ MEMA Responds to Trump Administration Announcement of
Additional 301 Tariffs on China, Motor & Equipment Manufacturers
Association, Jul. 11, 2018, <a href="https://www.mema.org/mema-responds-trump-administration-announcement-additional-301-tariffs-china">https://www.mema.org/mema-responds-trump-administration-announcement-additional-301-tariffs-china</a>.
\193\ U.S. Producers' Survey Response, Question 12c.
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[TEXT REDACTED] \194\ [TEXT REDACTED].\195\ As noted, automobile
parts suppliers play a critical role in developing the innovations
\196\ that make the automotive industry high-tech,\197\ and within the
industry, automobile parts suppliers employ approximately 40 percent of
all R&D scientists and engineers, while automobile manufacturers employ
the remaining 60 percent.\198\
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\194\ Id.; Department of Commerce, Bureau of Economic Analysis,
2012 Benchmark Input-Output tables. As calculated by Department of
Commerce. 2012 data are the latest available.
\195\ U.S. Producers' Survey Responses, Question 10a.
\196\ The importance of automotive suppliers in the automotive
R&D landscape is also demonstrated in future automotive
technologies, and none more so than autonomous vehicle technology.
For example, the Navigant Research Leaderboard, a respected and
often-cited ranking system, evaluates companies developing automated
driving systems. Several of the identified leaders are suppliers,
including Bosch, Aptiv (formerly Delphi), Autoliv, Magna, Valeo, and
ZF Friedrichshafen AG. Navigant Research Leaderboard: Automated
Driving Vehicles, <a href="https://www.navigantresearch.com/reports/navigant-research-leaderboard-automated-driving-vehicles">https://www.navigantresearch.com/reports/navigant-research-leaderboard-automated-driving-vehicles</a>.
\197\ Kim Hill, Bernard Swiecki, Debra Maranger Menk, and Joshua
Cregger, Just How High-Tech is the Automotive Industry?, Center for
Automotive Research, Jan. 2014, <a href="https://autoalliance.org/wp-content/uploads/2017/01/CARReport_Just_How_High_Tech_is_the_Automotive_Industry.pdf">https://autoalliance.org/wp-content/uploads/2017/01/CARReport_Just_How_High_Tech_is_the_Automotive_Industry.pdf</a>
\198\ Id.
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While American-owned producers lag behind their EU and Japanese
competitors in automobile R&D, South Korean and Chinese companies are
ramping up R&D expenditures and activities. Of course, there is a
direct correlation between innovation and manufacturing. Japanese and
EU firms are leaders in automobile production, and so their significant
levels of R&D expenditures should come as no surprise. Yet, it is also
important to emphasize the correlation between R&D expenditures and the
low level of import penetration in each foreign country's automobile
industry.\199\ As discussed in Appendix F, Japanese-owned automobile
producers enjoy a dominant position in their home market, as they
account for nearly 100 percent of domestic vehicle production in
Japan.\200\ [TEXT REDACTED].\201\
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\199\ David Autor, David Dorn, Gordon H. Hanson, Gary Pisano,
and Pian Shu, Foreign Competition and Domestic Innovation: Evidence
from U.S. Patents, American Economic Review: Insights, forthcoming,
December 2017, <a href="https://www.nber.org/papers/w22879">https://www.nber.org/papers/w22879</a>.
\200\ Wards Intelligence InfoBank.
\201\ U.S. Producers' Survey Responses, Question 10.
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Similarly, German-owned automobile producers account for 85 percent
of domestic vehicle production in Germany,\202\ and also rank [TEXT
REDACTED].\203\ The Volkswagen Group's research is based in Wolfsburg,
Germany, and the company describes this development center as ``the
innovation hub'' and the ``nerve centre of a global development
network'' for all Volkswagen Group brands.\204\
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\202\ Wards Intelligence InfoBank.
\203\ U.S. Producers' Survey Responses, Question 10.
\204\ Research and Development, Volkswagen, <a href="https://www.volkswagen-karriere.de/en/unsere-bereiche/forschung-entwicklung.html">https://www.volkswagen-karriere.de/en/unsere-bereiche/forschung-entwicklung.html</a>.
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Additionally, South Korean automobile producers account for 77
percent of domestic vehicle production in Korea,\205\ and Korea ranks
[TEXT REDACTED].\206\
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\205\ Wards Intelligence InfoBank.
\206\ U.S. Producers' Survey Responses, Question 10.
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The R&D spending by the largest foreign-owned automobile producers
is a direct reflection of the advantages the firms enjoy in their
protected home markets, as described in Appendix F. Volkswagen and
Toyota have been among the top 20 overall R&D spenders every year since
2005,\207\ and in 2017 these companies ranked first and second
respectively in terms of global R&D expenditures by vehicle producers,
a tremendous advantage in the highly competitive and always evolving
automotive industry.\208\ China is also increasing its investments in
automotive R&D, reaching $12 billion in 2015.\209\ Eighty-four
automotive research and design centers have opened in China in the past
12 years, with the key focus of activity in cutting-edge technologies
including connected vehicles and electric drivetrains.\210\
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\207\ PwC, The 2017 Global Innovation 1000 Study, supra.
\208\ Id.
\209\ Rishabh Saraswat, Automotive R&D Ecosystem in China: The
Road Ahead, DRAUP, Dec. 14 2017, <a href="https://draup.com/blog/automotive-rd-ecosystem-in-china-the-road-ahead/">https://draup.com/blog/automotive-rd-ecosystem-in-china-the-road-ahead/</a>.
\210\ Id.
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The internationalization of automotive R&D has focused primarily on
local product development, and core research remains concentrated near
the home bases of lead firms.\211\ Offshoring of automotive R&D is, in
large part, driven by the offshoring of manufacturing capabilities. As
manufacturers seek to reduce manufacturing costs, production
optimization compels the offshoring of R&D that follows. Data show that
a country's attractiveness to R&D centers is also driven by the number
of available science and engineering experts in that country.\212\ For
automotive R&D specifically, a 2008 PwC study and a 2012 study from the
European Commission on the automotive sector both list access to talent
pools and physical proximity to customers as the main factors driving
R&D location
[[Page 62074]]
decisions.\213\ Other factors included the size of the country's
economy and economic growth potential.
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\211\ Petr Pavl[iacute]nek, The Internationalization of
Corporate R&D and the Automotive Industry R&D of East-Central
Europe, Economic Geography, Apr. 25, 2012, <a href="https://www.researchgate.net/publication/260186659_The_Internationalization_of_Corporate_RD_and_the_Automotive_Industry_RD_of_East-Central_Europe">https://www.researchgate.net/publication/260186659_The_Internationalization_of_Corporate_RD_and_the_Automotive_Industry_RD_of_East-Central_Europe</a> at 4.
\212\ Rajesh K. Chandy, Andreas B. Eisingerich, Jaideep C.
Prabhu, and Gerard J. Tellis, Patterns in the Global Location of R&D
Centres by the World's Largest Firms: The Role of India and China,
January 2010, <a href="https://www.researchgate.net/publication/265870303_Patterns_in_the_global_location_of_RD_centres_by_the_world">https://www.researchgate.net/publication/265870303_Patterns_in_the_global_location_of_RD_centres_by_the_world</a>'
s_Largest_firms_The_role_of_India_and_China at 5.
\213\ Duncan Kay, Adarsh Varma, Carlos Martinez, Stephanie
Cesbron, Gena Gibson, and Dr. Peter Wells, Assessing the R&D and
Economic Performance of Key Industries: The Automotive Sector, AEA
Technology PLC report for European Commission, May 11, 2012, <a href="http://iri.jrc.ec.europa.eu/documents/10180/11632/Assessing%20the%20R%26D%20and%20economic%20performance%20of%20key%20industries%20-%20the%20automotive%20sector">http://iri.jrc.ec.europa.eu/documents/10180/11632/Assessing%20the%20R%26D%20and%20economic%20performance%20of%20key%20industries%20-%20the%20automotive%20sector</a> at iv.
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R&D decisions are also increasingly driven by government-based
initiatives to attract investment away from other automobile-producing
nations. For example, the Chinese Government has increased automotive
R&D in the domestic market through various incentives and restrictive
investment requirements. In 2006, the Government set aside $184 million
for automotive R&D support under its National High Tech R&D Program, a
program designed to accelerate R&D across a range of sectors.\214\
Under China's 13th Five-Year Plan (2016-2020), 20 New Energy Vehicle
(``NEV'') projects were allotted around $111 million pursuant to the
National Key Research and Development Program of China, a program
focused on rapidly developing new energy technologies.\215\
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\214\ Jieyi Lu, Comparing U.S. and Chinese Electric Vehicle
Policies, Environmental and Energy Study Institute, Feb. 28, 2018,
<a href="https://www.eesi.org/articles/view/comparing-u.s.-and-chinese-electric-vehicle-policies">https://www.eesi.org/articles/view/comparing-u.s.-and-chinese-electric-vehicle-policies</a>.
\215\ Id.
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Other traditionally low-cost countries with growing domestic
markets, or within close proximity to growing markets, have also
invested heavily in attracting automotive R&D. Hungary cut its
corporate tax rate to 9 percent--the lowest in the EU--and introduced
special tax incentives for companies with R&D investments.\216\ Hungary
recently invested $15 million in a test track for traditional and
autonomous vehicles that it intends will become a magnet for future
investment in automobile development and testing. Brazil is
implementing a 14-year incentive program that will offer up to BR1.5
billion ($467.4 million) in annual tax credits for automobile producers
and automobile parts manufacturers that reach certain R&D investment
targets.\217\
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\216\ Nick Gibbs, A Test Track Takes Hungary Deeper Into R&D,
Automotive News, July 8, 2018, <a href="http://www.autonews.com/article/20180708/OEM01/180709905/1740?template=economic-development">http://www.autonews.com/article/20180708/OEM01/180709905/1740?template=economic-development</a>.
\217\ Catherine Osborn, Brazilian Auto Industry Awaits Word on
Incentives, WardsAuto, Mar. 20, 2018, <a href="https://www.wardsauto.com/industry/brazilian-auto-industry-awaits-word-incentives">https://www.wardsauto.com/industry/brazilian-auto-industry-awaits-word-incentives</a>.
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Heavy investment in attracting R&D in new automotive technologies
is also a strategy for mature automobile producing countries. In order
to target new technologies and manufacturing, the South Korean
Government recently agreed to invest about 2 billion Euros into
hydrogen mobility (including fuel cells) over the next five years.
Facilities manufacturing fuel cell vehicles and those performing
related R&D will receive funding in order to reach the Government's
ambitious production target of 15,000 fuel cell vehicles by 2022.\218\
Additionally, fearing that the EU automobile industry could be left
behind in the race to build mass market electric vehicles because of
their reliance on batteries from Asia, the EU recently announced that
it will offer billions of Euros of funding to companies willing to
build giant battery factories in the region.\219\ Individual EU
countries will fund 100 percent of research.\220\
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\218\ South Korea to Invest [euro]2BN into Fuel Cell Vehicles,
<a href="http://electrive.com">electrive.com</a>, Jun. 25, 2018, <a href="https://www.electrive.com/2018/06/25/south-korea-to-invest-e2bn-into-fuel-cell-vehicles/">https://www.electrive.com/2018/06/25/south-korea-to-invest-e2bn-into-fuel-cell-vehicles/</a>.
\219\ Rochelle Toplensky, EU to Offer Billions of Funding for
Electric Vehicle Plants, Financial Times, Oct. 14, 2018, <a href="https://www.ft.com/content/097ff758-cec3-11e8-a9f2-7574db66bcd5?desktop=true">https://www.ft.com/content/097ff758-cec3-11e8-a9f2-7574db66bcd5?desktop=true</a>.
\220\ Id. ``The EU's Horizon 2020 research fund has set aside
[euro]200m for battery projects; [euro]800m is available to finance
building demonstration facilities; regions looking to promote the
industry can apply for the [euro]22bn regional funds available; and
the European Fund for Strategic Investment is available from the
European Investment Bank to co-fund the billions of euros needed to
build an EU equivalent of Tesla's `gigafactory' in the Nevada
desert.''
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Government efforts worldwide to divert automotive R&D and related
manufacturing abroad is particularly dangerous for the American-owned
automotive industry. Data show that, across all industries, the United
States heavily outsources R&D to other nations and that the automotive
industry is a large driver of this R&D offshoring trend.\221\ The
offshoring of R&D activities (coupled with manufacturing) jeopardizes
the ability of the U.S. automotive industry, and specifically American-
owned manufacturers, to develop innovative products and deliver high-
tech products and skilled workers to the industrial base, threatening
technological advancements necessary for defense capabilities. Further,
the offshoring of R&D and manufacturing will increasingly render the
United States reliant on imported products. Conditions of competition
must be improved so that American-owned automobile producers and
automobile parts manufacturers are able to increase production in the
United States, and thereby augment R&D levels to develop and capitalize
on the latest technologies domestically.
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\221\ J. John Wu, Why U.S. Business R&D Is Not as Strong as It
Appears, Information Technology & Innovation Foundation, June 2018.
<a href="http://www2.itif.org/2018-us-business-rd.pdf">http://www2.itif.org/2018-us-business-rd.pdf</a> at 10, 13, 14.
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D. Decline in Employment in the U.S. Automotive Industry
The deterioration in the competitive position of the U.S.
automobile and automobile parts manufacturing industry outlined above
is further evidenced by the decline in U.S. automotive industry
employment, and in particular employment by American-owned firms. The
U.S. automobile and automobile parts industry (American-owned and
foreign-owned firms) employs approximately 798,300 workers, or
approximately 6 percent of the nation's manufacturing workforce.\222\
This is a significant drop from the recent peak in 2000, when the
industry accounted for 291,400 automobile assembly jobs and 839,500
automobile parts manufacturing jobs.\223\ The decline amounts to a loss
of 332,600 manufacturing jobs, which is equivalent to approximately 7
percent of the loss in all manufacturing jobs between 2000 and
2017.\224\ American-owned automobile manufacturing plants account for
[TEXT REDACTED] of the overall workforce across all U.S. based-
automobile plants.\225\
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\222\ Bureau of Labor Statistics, Total Employment for Motor
Vehicles and Motor Vehicle Parts, supra.
\223\ Id.
\224\ Id.
\225\ U.S. Producers' Survey Responses, Question 8.
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BILLING CODE 3510-DR-P
[[Page 62075]]
[GRAPHIC] [TIFF OMITTED] TN08NO21.066
Further, as shown in Figure 27, the sharp decline in passenger
vehicle manufacturing employment (sedans, SUVs, CUVs, and vans)
accounts for the majority of the overall decline in automobile
manufacturing jobs. This steep 32 percent decline (equivalent to 54,400
jobs) coincided with the 282 percent increase in passenger vehicle
imports during this same period. Light truck imports rose more than 150
percent over the same period, contributing to job losses of two percent
overall in the United States (equivalent to 1,400 jobs).\226\
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\226\ Bureau of Labor Statistics, Total Employment for Motor
Vehicles and Motor Vehicle Parts, supra.; Department of Commerce,
Census Bureau.
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[[Page 62076]]
[GRAPHIC] [TIFF OMITTED] TN08NO21.067
Figure 28 disaggregates job losses in automobile parts
manufacturing by segment. Most of the decrease in automobile parts
manufacturing employment is due to a 48 percent reduction in the
workforce for electrical component manufacturing and a 23 percent
reduction in engine and engine parts manufacturing. Although jobs in
powertrain component manufacturing have increased since 2009, the
number of lost jobs in that sector amount to 25,000 since 2000.
Further, the skill level involved in this sector is rapidly eroding as
imports of powertrain parts have caused the U.S. transmission industry
to shift to assembly rather than product development and manufacturing.
Overall, for parts manufacture, American-owned producers account for
approximately 50 percent of the U.S.-based workforce.\227\
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\227\ Bureau of Economic Analysis, Foreign Direct Investment in
the United States, Data on Activities of Multinational Enterprises;
Bureau of Labor Statistics, Current Employment Statistics.
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[[Page 62077]]
[GRAPHIC] [TIFF OMITTED] TN08NO21.068
BILLING CODE 3510-DR-C
The loss of manufacturing jobs parallels the rate of closure of
U.S. automobile manufacturing plants, in particular American-owned
manufacturing plants.\228\ In 1985, American-owned producers operated
62 assembly plants in the United States and produced 97 percent of the
11.4 million passenger vehicles and light trucks produced in the United
States.\229\ By 2000, American-owned producers were operating only 44
plants and their share of U.S. production had dropped from 97 percent
to 67 percent.\230\ Finally, by 2017, American-owned producers were
operating only 24 assembly plants in the United States and producing
only 42 percent of total U.S. production, notwithstanding the fact that
overall demand for automobiles in the United States increased by 11
percent during the 1985 to 2017 period.\231\ Moreover, GM recently
announced its intent to close five additional plants and lay off
approximately 15,000 workers in 2019.\232\ In January 2019, Tesla
announced a planned seven percent contraction of its workforce.\233\ By
contrast, foreign-owned automobile manufacturers in the United States
(EU, Japanese and South Korean manufacturers), have expanded operations
over the past three decades and increased the number of facilities
operating in the United States from 3 facilities in 1985 to 22 in
2017.\234\ As noted above, their expansion in the U.S. market has come
at the expense of American-owned producers, who (as detailed in
Appendix F) do not have the same market access in the EU, Japan and
South Korea as their foreign counterparts do in the United States.
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\228\ U.S. automotive employment--and consequently job losses--
has been spread across the United States. While Michigan continues
to have the largest share at 172,000 workers, many other states are
significant employers as well. Indiana currently employs 111,500
automotive workers, Ohio employs 95,300 workers, Kentucky employs
60,500 workers, and Alabama employs 38,300 workers, along with
smaller employment in California, Missouri, Texas, New York, and
Mississippi. Bureau of Labor Statistics, Total Employment for Motor
Vehicles and Motor Vehicle Parts, supra.
\229\ Wards Intelligence InfoBank.
\230\ Id.
\231\ Id.
\232\ Eric Morath, GM Closings a Fresh Sign of Worry for
Economy, Wall Street Journal, Nov. 26, 2018, <a href="https://www.wsj.com/articles/gm-closings-a-fresh-sign-of-worry-for-economy-1543271097">https://www.wsj.com/articles/gm-closings-a-fresh-sign-of-worry-for-economy-1543271097</a>.
\233\ Tesla, Company Update, January 18, 2019, <a href="https://www.tesla.com/blog/tesla-company-update">https://www.tesla.com/blog/tesla-company-update</a>.
\234\ Wards Intelligence InfoBank.
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With the ongoing contraction of automobile and automobile parts
production in the United States and resulting plant closures by
American-owned firms, employment in the U.S. automotive manufacturing
industry will shrink further. As noted, today's production of
automobiles and automobile parts is a complex and technical process
that demands a trained, skilled workforce that in many cases requires a
decade or more of experience. Given that the United States needs to
rely on American-owned facilities to develop cutting-edge technologies
with national defense capabilities, it is imperative that a robust and
skilled workforce is available to manufacture and operate those
technologies. For this reason, the loss of skilled workers at American-
owned plants is detrimental to America's manufacturing and innovation
capabilities, and consequently America's ability to develop new and
emerging technologies for military applications.
VII. Conclusion
Based on the findings in this report, the Secretary concludes that
the present quantities and circumstances of imports of automobiles and
certain automobile parts, specifically engines and engine parts,
transmissions and powertrain parts, and electrical components as
defined in Section VIII, are ``weakening our internal economy'' and
threaten to impair national security as set forth in Section 232.
As discussed throughout this report, the negative impact of imports
and the resulting displacement of production by American-owned
automobile and automobile parts manufacturers are significant, and are
increasing given that the U.S. automobile market is experiencing a
decline in demand. A decline in demand is expected in the next several
years due to a number of factors that impact the normal sales cycle,
and many indicators point to market saturation. For example, the ratio
of automobiles to households is
[[Page 62078]]
now 2:1, a record high. In addition, while approximately one quarter of
the automobiles on the road are less than four years old, the average
age of automobiles in the United States increased from 8.4 years in
1995 to 11.6 years in 2016,\235\ and the tendency of consumers to keep
automobiles longer has negatively impacted demand. (This has caused the
gap between new and used automobile prices to reach record highs.)
Sales peaked in 2016 at 17.5 million units, but declined to 17.1
million units in 2017, and remained at roughly the same level in 2018.
A further decline in demand is expected in 2019, with interest rates
projected to rise and recent reports indicating that $56.8 billion in
auto loans are delinquent.\236\ Equally as important, exports to
foreign markets are unlikely to provide avenues for additional sales
and revenue as tariff and non-tariff barriers to entry discourage U.S.
automotive exports and the U.S. dollar remains strong relative to
Europe, Japan, and China. Finally, employment in the automotive sector
remains significantly below the industry's employment peak in 2000,
impacting the ability to maintain a highly skilled workforce that is
essential for national security needs.
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\235\ U.S. Department of Transportation, Bureau of
Transportation Statistics, <a href="https://www.bts.gov/content/average-age-automobiles-and-trucks-operation-united-states">https://www.bts.gov/content/average-age-automobiles-and-trucks-operation-united-states</a>.
\236\ David Harrison, Auto Borrowing Rises as New Mortgage Loans
Sag, New York Fed Says, Wall Street Journal, Feb. 12, 2019, <a href="https://www.wsj.com/articles/auto-borrowing-rises-as-new-mortgage-loans-sag-new-york-fed-says-11549988807?mod=searchresults&page=1&pos=7">https://www.wsj.com/articles/auto-borrowing-rises-as-new-mortgage-loans-sag-new-york-fed-says-11549988807?mod=searchresults&page=1&pos=7</a>.
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Defense purchases alone are not sufficient to support a robust
military vehicle
[…truncated; see source link]Indexed from Federal Register on November 8, 2021.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.