Best's Review



At Large
Trade War Casualties

Policyholders are in the crosshairs when tariffs increase.
  • Robert P. Hartwig
  • September 2018
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Robert P. Hartwig

Robert P. Hartwig, University of South Carolina

“Economists agree on few things, but one of the few things they do agree upon are the benefits of free trade. In a trade war, there are no winners—only losers. Tens of millions of policyholders are about to join the long list of America’s trade war casualties.”

To the average insurance consumer, the notion that their next policy renewal could contain a rate increase courtesy of the Trump administration's increasingly aggressive trade policies may seem strange. Yet they need look no further than those hunks of steel and aluminum on wheels in their driveway or that pile of lumber they call home for the reason.

Indeed, with tariffs of 25% on steel, 10% on aluminum and 20% on lumber already in place, the impacts are already rippling through the industry. It's only a matter of time before these costs invade policyholder wallets. The administration is now threatening a 25% tariff on imported auto parts, as well as potentially thousands of other items that are routinely protected by insurers.

Tariffs are a tax on imports and are therefore implicitly a tax on everything made or sold using those taxed items. An insurance policy may be made out of paper, but in practice it's a promise to buy the tons of lumber, metals and parts necessary to make the policyholder whole. According to the Peterson Institute for International Economics, tariffs will push up the cost of new cars by between $1,400 and $7,000. Own an American car? The reality is that every car is an import today, with domestically produced models deriving 30% to 50% or more of their value from foreign parts. The outlook isn't much better for homeowners. Nearly one-third of the lumber used in American homes in recent years comes from Canadian sources. U.S. lumber mills can't fill the void, so prices are skyrocketing—up some 40% through the first half of 2018.

Insurers have sharp pencils and have been working through the math, particularly in the auto insurance lines, which collectively account for more than 40% of all property/casualty premiums written. According to a consortium of insurer trade groups, some 31 countries in 2017 exported $100 million or more in automotive parts to the United States, accounting for 60% of all auto parts used in this country. Parts accounted for 39.7% of total repair costs for personal auto insurers in 2017, with repairs requiring an average of 9.5 replacement parts.

Drilling down, insurers estimate that 10.9% of all repair costs are derived from imported parts. Assuming a 25% tariff implies that repair costs in the personal auto line alone could rise by 2.7% or $3.4 billion—and by several hundred million more when the impact on commercial auto insurers is considered. Oh, and given that all of those expensive parts will be even more attractive to thieves and their chop shop clients, auto theft rates are expected to rise, too.

Tariffs will further pressure both personal and commercial auto insurance prices, which were already up by more than 7% over the past year. State insurance departments would be wise to prepare now to be deluged with hundreds, if not thousands, of filings for rate increases as insurers seek to recover the cost associated with the implementation of what amounts to a new federal tax on the nation's 225 million drivers.

That tariffs will directly impact pricing is obvious, but policyholders will be forgiven if they still fail to see the supporting logic and rationale of how auto parts were conscripted into the front lines of today's trade war. To make that happen, the U.S. Commerce Department is relying on convoluted interpretations of a Cold War legislative relic—the Trade Expansion Act of 1962. Under Section 232 of that act, the president is empowered to restrict imports that he determines to be a threat to national security. You heard it right: That imported bumper, radiator and fan belt your insurer will pay for as part of your next fender bender—all threats to national security. If this logic seems far flung that's because it is. In reality, there is no legal national security rationale to impose tariffs on auto parts or automobiles.

Keep in mind that President Donald Trump's rationale for tariffs stems from his concern about the U.S. trade deficit—that it is too large and is the result of unfair competition. To some degree this is true; the playing field is not always level. At the same time, the fundamental reason why the United States runs such an enormous trade deficit ($566 billion in 2017 or about 2.4% of GDP) is because as a nation we spend more money than we earn. Consequently, we borrow heavily from abroad to finance this spending, much of it on foreign goods. Trade deficits and budget deficits are essentially opposite sides of the same coin. The Tax Cuts and Jobs Act of 2017 will increase the federal budget deficit by an estimated $1.44 trillion over the next decade, according to the Congressional Budget Office. Financing these deficits will lead directly to even more borrowing and higher trade deficits.

Because profligate spending and borrowing by consumers and government are the root cause of America's trade deficit, it is clear that tariffs are not the cure. Living within our means is. Tariffs and the retaliatory tariffs they invite are blunt instruments that bludgeon trading partners, U.S. businesses and American consumers alike—with many unintended consequences. Higher auto insurance premiums for millions of American drivers is one of countless examples.

The optimal strategy now is for Trump to work a deal whereby tariffs and other nontariff barriers to trade (such as subsidies) are negotiated to zero. This bold approach would bring lower prices and more choices to consumers in the United States and among its trading partners. Other trade issues, such as protection of intellectual property for U.S. firms operating abroad, need to be negotiated separately, perhaps through the World Trade Organization.

Economists (including this author) agree on few things, but one of the few things they do agree upon are the benefits of free trade. In a trade war, there are no winners—only losers. Tens of millions of policyholders are about to join the long list of America's trade war casualties.



Robert P. Hartwig, PhD. CPCU, is past president of the Insurance Information Institute and current director of the Center for Risk and Uncertainty Management at the University of South Carolina’s Darla Moore School of Business. He can be reached at

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