[Federal Register Volume 86, Number 213 (Monday, November 8, 2021)]
[Notices]
[Pages 62028-62079]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-24162]



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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 https://www.bis.doc.gov/index.php/other-areas/office-of-technology-evaluation-ote/section-232-investigations.

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 www.bis.doc.gov/232.

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

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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, https://www.visualcapitalist.com/future-automobile-innovation/.
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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

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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\
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    \11\ 2001 Report at 5 (supra n. 3). See also 2018 Steel Report 
at 13; 2018 Aluminum Report at 12-13.
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    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\
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    \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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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 Regulations.gov website specific to this 
investigation: https://www.regulations.gov/docket?D=DOC-2018-0002.

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\
---------------------------------------------------------------------------

    \21\ See Appendix A.
    \22\ 19 U.S.C. 1862(b)(2).
    \23\ Id.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \26\ Department of Labor, Bureau of Labor Statistics, Automotive 
Industry: Employment, Earnings, and Hours, https://www.bls.gov/iag/tgs/iagauto.htm.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \34\ See Section V, Part C.
---------------------------------------------------------------------------

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, https://www.ft.com/content/40065b50-715e-11e7-93ff-99f383b09ff9.

---------------------------------------------------------------------------

[[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, https://www.bls.gov/iag/tgs/iagauto.htm.
    \39\ Thomas H. Klier and James M. Rubenstein, Imports of 
Intermediate Parts in the Auto Industry--A Case Study, November 6-7, 
2009, https://upjohn.org/measurement/klier-rubenstein-final.pdf at 
4.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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, 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.
    \42\ International Labor Comparisons, The Conference Board, 
https://www.conference-board.org/ilcprogram.
    \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.
---------------------------------------------------------------------------

    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, http://tariffdata.wto.org/.
    \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, https://www.wardsauto.com/industry/canadian-eu-auto-industries-welcome-trade-pact.
[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.

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[[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, 
https://www.govinfo.gov/content/pkg/STATUTE-77/pdf/STATUTE-77-Pg1035.pdf.

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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.

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[[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.

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[[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.

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[[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.

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[[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.

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[[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.
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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, https://ustr.gov/sites/default/files/Section%20301%20FINAL.PDF at 139. See also Shai Oster, Excess 
auto capacity in China could leave dents in car makers, Wall Street 
Journal, November 17, 2005, https://www.wsj.com/articles/SB113218114486399413.
[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, https://www.usitc.gov/tata/hts/index.htm.
[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, https://www.federalreserve.gov/releases/g17/current/.
[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, https://www.nydailynews.com/autos/buyers-guide/10-top-reasons-people-buy-specific-cars-article-1.2552707.
    \91\ Wards Intelligence InfoBank.
    \92\ Department of Labor, Bureau of Labor Statistics, Consumer 
Price Index, https://www.bls.gov/cpi/ (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.

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[[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, https://www.consumerreports.org/pickup-trucks/are-pickup-trucks-becoming-the-new-family-car/.
---------------------------------------------------------------------------

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.

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[[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, https://www.bls.gov/lpc/; 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, https://www.bls.gov/lpc/.
    \117\ U.S. Producers' Survey Responses, Question 6.

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[[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.

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[[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, 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.
    \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, https://www.nae.edu/File.aspx?id=10284&v=79e01bce. 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, https://www.nytimes.com/1998/06/24/business/international-business-a-20-year-gm-parts-migration-to-mexico.html. 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, http://www.latimes.com/world/mexico-americas/la-fg-mexico-us-factories-20170217-htmlstory.html. 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, http://www.autonews.com/article/20070521/SUB/70516021/trw-plan%3A-buy-more-parts-from-low-cost-countries. 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, https://www.autonews.com/assets/PDF/CA89220617.PDF.
---------------------------------------------------------------------------

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, https://www.kpmg.de/docs/Global_Location.pdf.
    \137\ See Gary P. Pisano and Willy C. Shih, Does America Really 
Need Manufacturing, Harvard Business Review, March 2012, https://hbr.org/2012/03/does-america-really-need-manufacturing; The 
Proximity of Manufacturing Increases the Rate of R&D Efficiencies, 
Aalto University, Mar. 15, 2017, https://phys.org/news/2017-03-proximity-efficiencies.html.
---------------------------------------------------------------------------

    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, https://www.hbs.edu/faculty/Publication%20Files/10-064.pdf.
    \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, http://ec.europa.eu/DocsRoom/documents/6958/attachments/1/translations/en/renditions/native 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, 
http://www.insideindianabusiness.com/story/37513588/cummins-to-design-combat-engines-that-elude-the-enemy.
    \144\ Cummins, ``Holset Turbo Technologies, Innovative 
Engineering, Absolute Reliability,'' https://www.cummins.com/components/holset-turbo-technologies.
---------------------------------------------------------------------------

    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,'' https://tardec.army.mil/#content/4.
    \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, https://media.gm.com/media/us/en/gm/news.detail.html/content/Pages/news/us/en/2016/oct/1003-zh2.html.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \148\ Chris Williams, DoE, Army Alliance Underlines Achieving 
Energy Security, Tank Automotive Research, Development and 
Engineering Center, Aug. 1, 2011, https://www.army.mil/article/62727/doe_army_alliance_underlines_achieving_energy_security.
    \149\ John Tasdemir, Ground Vehicle Systems Engineering and 
Technology Symposium, GVPM Powertrain Overview, Aug. 11, 2011, 
http://www.dtic.mil/dtic/tr/fulltext/u2/a547261.pdf.
---------------------------------------------------------------------------

    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, https://insidedefense.com/share/196943. A foreign-owned 
supplier won this competition, indicating the needs to better 
support the competitiveness of American-owned manufacturers.

     First tier suppliers: Allison, L3, Twin Disc, General 
Engine Products
     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\
---------------------------------------------------------------------------

    \152\ Richard Wilson, Military Vehicles in High Speed Data 
Connection,'' ElectronicsWeekly.com, May 21, 2013, https://www.electronicsweekly.com/market-sectors/military-aerospace-electronics/military-vehicles-in-high-speed-data-connection-2013-05/.
---------------------------------------------------------------------------

    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:
---------------------------------------------------------------------------

    \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, 
https://fas.org/sgp/crs/misc/R44544.pdf at 21; Brig. Gen. John 
Adams, America's Semiconductors Supply Chain Faces Big Cybersecurity 
Risks, Alliance for American Manufacturing Blog, Mar. 23, 2017, 
http://www.americanmanufacturing.org/blog/entry/americas-semiconductors-supply-chain-faces-big-cybersecurity-risks. See also 
Falan Yinug, How U.S. Semiconductor Technology Strengthens Our 
Military on the Battlefield, Semiconductor Industry Association 
Blog, Jan. 26, 2016, http://blog.semiconductors.org/blog/how-us-semiconductor-technology-strengthens-our-military-on-the-battlefield.
    \154\ Dave Chesebrough, Trusted Microelectronics: A Critical 
Defense Need, National Defense, Oct. 31, 2017, http://www.nationaldefensemagazine.org/articles/2017/10/31/trusted-microelectronics-a-critical-defense-need.
    \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, https://www.popularmechanics.com/military/research/a17100/patriot-missiles-radar-gallium-nitride/; NDIA Trusted Microelectronics Joint Working 
Group, Future Needs & System Impact of Microelectronics 
Technologies, Jul. 2017, https://www.intrinsix.com/hubfs/Premium_Content/trusted-asic-design/Future_Needs_and_System_Impact_of_Microelectronics_Technologies.pdf.

     First tier suppliers: Harris, Telephonics Corporation, 
DRS*, Rockwell Collins.
     General suppliers of semiconductors: Intel, Micron, 
Qualcomm, AMD, Applied Materials, Cadence, Synopsys.\156\
---------------------------------------------------------------------------

    \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, http://www.icinsights.com/news/bulletins/Automotive-Electronic-Systems-Growth-Strongest-Through-2021/.
---------------------------------------------------------------------------

     Sub-tier commercial suppliers for communication systems/
components to North America: Denso International America Inc.*
     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.*
     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.
     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.
---------------------------------------------------------------------------

    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]]

     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, https://lift.technology/manufacturingusa/.
---------------------------------------------------------------------------

     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, https://crsreports.congress.gov/product/pdf/R/R45110.
---------------------------------------------------------------------------

     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, https://tardec.army.mil/.
    \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, 
https://www.dvidshub.net/news/277762/tardec-gm-bring-surus-smithsonian-and-sofic.
---------------------------------------------------------------------------

     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, http://arc.engin.umich.edu/about/industry-partners.html.

------------------------------------------------------------------------
 
------------------------------------------------------------------------
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, https://dod.defense.gov/Portals/1/Documents/pubs/2018-National-Defense-Strategy-Summary.pdf 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, http://www.americanautocouncil.org/sites/aapc2016/files/2018%20Economic%20Contribution%20Report.pdf 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, https://www.strategyand.pwc.com/innovation1000#VisualTabs3.
    \170\ U.S. Producers' Survey Responses, Question 10a.
    \171\ Stefan Di Bitonto, The Automotive Industry in Germany, 
Germany Trade & Invest, 2018, https://www.gtai.de/GTAI/Content/EN/Invest/_SharedDocs/Downloads/GTAI/Industry-overviews/industry-overview-automotive-industry-en.pdf; see Toyota Motor Company annual 
report, March 31, 2018, https://www.toyota-global.com/pages/contents/investors/ir_library/annual/pdf/2018/annual_report_2018_fie.pdf 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, https://asia.nikkei.com/Business/Companies/Toyota-pours-22bn-into-R-D-as-Apple-and-Google-close-in. 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, http://fortune.com/2018/01/14/ford-11-billion-electric-car-investment/. 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, 
https://www.assemblymag.com/articles/94194-bmw-to-spend-record-amount-on-rd-to-prepare-for-electric-cars-self-driving-cars.
---------------------------------------------------------------------------

    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, https://www.strategyand.pwc.com/media/file/Innnovation-1000-2015-Auto-industry-findings-infographic.pdf.
    \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\
---------------------------------------------------------------------------

    \191\ Id.
    \192\ MEMA Responds to Trump Administration Announcement of 
Additional 301 Tariffs on China, Motor & Equipment Manufacturers 
Association, Jul. 11, 2018, https://www.mema.org/mema-responds-trump-administration-announcement-additional-301-tariffs-china.
    \193\ U.S. Producers' Survey Response, Question 12c.
---------------------------------------------------------------------------

    [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\
---------------------------------------------------------------------------

    \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, https://www.navigantresearch.com/reports/navigant-research-leaderboard-automated-driving-vehicles.
    \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, https://autoalliance.org/wp-content/uploads/2017/01/CARReport_Just_How_High_Tech_is_the_Automotive_Industry.pdf
    \198\ Id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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, https://www.nber.org/papers/w22879.
    \200\ Wards Intelligence InfoBank.
    \201\ U.S. Producers' Survey Responses, Question 10.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \202\ Wards Intelligence InfoBank.
    \203\ U.S. Producers' Survey Responses, Question 10.
    \204\ Research and Development, Volkswagen, https://www.volkswagen-karriere.de/en/unsere-bereiche/forschung-entwicklung.html.
---------------------------------------------------------------------------

    Additionally, South Korean automobile producers account for 77 
percent of domestic vehicle production in Korea,\205\ and Korea ranks 
[TEXT REDACTED].\206\
---------------------------------------------------------------------------

    \205\ Wards Intelligence InfoBank.
    \206\ U.S. Producers' Survey Responses, Question 10.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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, https://draup.com/blog/automotive-rd-ecosystem-in-china-the-road-ahead/.
    \210\ Id.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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, https://www.researchgate.net/publication/260186659_The_Internationalization_of_Corporate_RD_and_the_Automotive_Industry_RD_of_East-Central_Europe 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, https://www.researchgate.net/publication/265870303_Patterns_in_the_global_location_of_RD_centres_by_the_world'
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, http://iri.jrc.ec.europa.eu/documents/10180/11632/Assessing%20the%20R%26D%20and%20economic%20performance%20of%20key%20industries%20-%20the%20automotive%20sector at iv.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \214\ Jieyi Lu, Comparing U.S. and Chinese Electric Vehicle 
Policies, Environmental and Energy Study Institute, Feb. 28, 2018, 
https://www.eesi.org/articles/view/comparing-u.s.-and-chinese-electric-vehicle-policies.
    \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, http://www.autonews.com/article/20180708/OEM01/180709905/1740?template=economic-development.
    \217\ Catherine Osborn, Brazilian Auto Industry Awaits Word on 
Incentives, WardsAuto, Mar. 20, 2018, https://www.wardsauto.com/industry/brazilian-auto-industry-awaits-word-incentives.
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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, 
electrive.com, Jun. 25, 2018, https://www.electrive.com/2018/06/25/south-korea-to-invest-e2bn-into-fuel-cell-vehicles/.
    \219\ Rochelle Toplensky, EU to Offer Billions of Funding for 
Electric Vehicle Plants, Financial Times, Oct. 14, 2018, https://www.ft.com/content/097ff758-cec3-11e8-a9f2-7574db66bcd5?desktop=true.
    \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. 
http://www2.itif.org/2018-us-business-rd.pdf 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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[[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, https://www.wsj.com/articles/gm-closings-a-fresh-sign-of-worry-for-economy-1543271097.
    \233\ Tesla, Company Update, January 18, 2019, https://www.tesla.com/blog/tesla-company-update.
    \234\ Wards Intelligence InfoBank.
---------------------------------------------------------------------------

    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, https://www.bts.gov/content/average-age-automobiles-and-trucks-operation-united-states.
    \236\ David Harrison, Auto Borrowing Rises as New Mortgage Loans 
Sag, New York Fed Says, Wall Street Journal, Feb. 12, 2019, https://www.wsj.com/articles/auto-borrowing-rises-as-new-mortgage-loans-sag-new-york-fed-says-11549988807?mod=searchresults&page=1&pos=7.
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    Defense purchases alone are not sufficient to support a robust 
military vehicle supply chain and R&D in key automotive technologies 
(such as autonomous driving, vehicle lightweighting, electrification, 
and connectivity) that are vital to meeting the needs of national 
defense. To be available to meet national defense needs, 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 ensure 
that the United States maintains the ability to produce cutting-edge 
technologies that are essential to America's national security.
    The many factors listed in this report form 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. 
1862(c).

VIII. Recommendation

    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.

Automobiles and Automobile Parts Subject to Tariffs Described Above

Electrical Components & Parts: 8414308030; 8414596040; 8414596540; 
8414598040; 8415830040; 8507100060; 8507304000; 8507404000; 8507600010; 
8507904000; 8511200000; 8511300040; 8511300080; 8511400000; 8511500000; 
8511802000; 8512202040; 8512204000; 8512204040; 8512300020; 8512300030; 
8512404000; 8525201500; 8525206020; 8525209020; 8525601010; 8527211015; 
8527211020; 8527211025; 8527211030; 8527211500; 8527212510; 8527212525; 
8527214000; 8527214040; 8527214080; 8527214800; 8527290020; 8527290040; 
8527290060; 8527294000; 8527298000; 8527298020; 8527298060;

[[Page 62079]]

8531800038; 8531808038; 8531809031; 8531809038; 8536410005; 8539100040; 
9029108000; 9104004510; 8536906000; 8539100010; 8539100020; 8539100050; 
8539212040; 8544300000; 9029104000; 9029204080; 9029902000; 9029908040; 
9029908080; 9104002510; 9104004000
Engines & Parts: 4010101020; 4016931010; 4016931020; 4016931050; 
4016931090; 8407341400; 8407341540; 8407341580; 8407341800; 8407342040; 
8407342080; 8407344400; 8407344540; 8407344580; 8407344800; 8408202000; 
8409913000; 8409915080; 8409915081; 8409155085; 8409919110; 8409919190; 
8409919910; 8409991040; 8409999110; 8409999190; 8413301000; 8413309060; 
8414593000; 8414800500
Transmission, Powertrain & Parts: 8708401000; 8708401110; 8708401150; 
8708402000; 8708405000; 8708407550; 8708407000; 8708407570; 8708407580; 
8708935000; 8708936000; 8708937500
Passenger Vehicles & Light Trucks 8703220000; 8703230015; 8703230022; 
8703230024; 8703230026; 8703230028; 8703230030; 8703230032; 8703230034; 
8703230036; 8703230038; 8703230042; 8703230044; 8703230045; 8703230046; 
8703230048; 8703230052; 8703230060; 8703230062; 8703230064; 8703230066; 
8703230068; 8703230072; 8703230074; 8703230075; 8703230076; 8703230078; 
8703240032; 8703240034; 8703240036; 8703240038; 8703240042; 8703240050; 
8703240052; 8703240054; 8703240056; 8703240058; 8703240060; 8703240062; 
8703240064; 8703240066; 8703240068; 8703240075; 8703310000; 8703320010; 
8703330045; 8703330060; 8703900000; 8703220100; 8703230120; 8703230130; 
8703230140; 8703230160; 8703230170; 8703240140; 8703240150; 8703240160; 
8703310100; 8703320110; 8703330145; 8703330185; 8703400010; 8703400020; 
8703400030; 8703400040; 8703400070; 8703600020; 8703600030; 8703600080; 
8703700030; 8703700070; 8703800000; 8703900100; 8704210000; 8704310020; 
8704310040

    Dated: November 1, 2021.
Anne Driscoll,
Acting Assistant Secretary for Industry and Analysis.
[FR Doc. 2021-24162 Filed 11-5-21; 8:45 am]
BILLING CODE 3510-DR-P