Trump and the Auto Industry
One of the few points of consistency for President Trump, both during his election campaign and his presidency, is pursuing a far more protectionist trade policy.
He has pledged to scrap the Trans-Pacific Partnership, rework the North American Free Trade Agreement (NAFTA), and label China a currency manipulator, though he has yet to follow through with the last two. However, there are other areas of his trade policy that are worthy of concern. Take, for example, his proposed tariffs on steel and Mexican imports.
At the end of June, President Trump proposed increasing tariffs on imported steel. At the time, it was unclear if it would target only certain producers of steel, like former president Obama’s 500 percent tariff on Chinese steel last year, or if it would affect all foreign producers universally. Naturally, domestic steel producers were overjoyed at the proposition, while domestic automakers and other large consumers of steel were not.
Shortly after his inauguration in January, President Trump also proposed a 20 percent tariff on all goods imported from Mexico, as a way of funding his proposed border wall. In an interview with The Atlantic, Dartmouth University economist Douglas Irwin pointed out several issues with the proposed tariff.
Firstly, there was the question of whether or not President Trump had the power to impose such a tariff. Irwin stated that “it [wasn’t] clear,” and went on to cite a precedent in the Trade Act of 1974. Irwin also went on to describe that the incidence of the tax would be “a tricky thing to assess,” and that he believed the incidence would likely fall onto consumers rather than companies.
President Trump has yet to instate either policy, but the precedent he is setting with these proposals is worrying, especially to those involved in any way with the auto industry in the near future, whether as a consumer or employee. Both policies would have dire consequences for the industry, for both domestic and foreign marques.
Take, for example, Ford. Ford has been producing automobiles for over 110 years and in that time provided thousands of Americans with jobs as well as the first mass-produced car.
However, the Automotive Policy Council (which also lobbies on behalf of GM) fears that many of those jobs would be lost as a result of the steel tariff. Ford has also announced that it still plans to move forward with plants in Mexico despite President Trump’s alleged tariffs and has also announced that the next generation Focus will be built in China.
Fiat-Chrysler has also been affected and according to statements from CEO Sergio Marchionne in January, the company may be forced to close its Mexican factories, which count for 17 percent of the company’s total production.
Mary Barra, CEO of GM and one of Trump’s advisors, stated that GM would be moving forward with plans to produce the GMC Terrain in Mexico as well as continuing to produce a portion of the Chevrolet Cruze units in Mexico.
Meanwhile, foreign companies like BMW will continue to produce cars in the US. While this may seem all well and good, there will undoubtedly be complications.
Increased tariffs on American cars that are assembled abroad will cause the prices of those cars to spike, which will lead foreign marques that have factories here in the United States to ponder the question of whether they keep their prices the same and seize more of the market, or increase their prices to keep their products “in line” with the competition.
Take BMW as an example. In June of this year, its Spartanburg factory produced 35,610 units according to the factory’s website. In terms of BMW’s global sales, that number may not seem terribly large, however, BMW, as well as its main rivals Audi and Mercedes, has a very structured pricing scheme. The cheapest models are the 2-Series models, starting around $33,000, followed by the 3, 4, 5, 6, and 7 Series vehicles.
At the Spartanburg plant, BMW produces its X3, X4, X5, and X6 models, but not its X1 models, which are built in Germany. In order to keep its lineup in order, BMW would be forced to increase the prices of its American-built vehicles proportionally to the increases in all of its German built models.
Every manufacturer would fall victim to this price increase, with the exceptions of Tesla and Cadillac since they are the only two (significant) marques that produce solely in America.
There are, of course, several very small companies that produce a handful of cars each year, but their market influence is negligible. In the American market, Cadillac and Tesla would be left with a choice. They could maintain their pricing and seize the market, or simply inflate their prices to fall back in line with their relative market positions.
Cadillac is a subsidiary of General Motors, and has been the company’s luxury brand for over 100 years. Therefore, it isn’t hard to imagine that GM will want to keep that brand identity, especially since their marketing team has been trying to position the marque as the kingpin it was back in the 20th century.
Tesla, on the other hand, would be more of a wildcard. Elon Musk has poured mind-boggling amounts of capital building it into what it is today – the first fully usable modern electric car (Detroit Electric had a good run from 1907-1939, but the brand quickly faded into obscurity).
Based on Musk’s statements and Tesla’s upcoming “budget” Model 3, it’s very likely that the company would take advantage of being relatively cheaper in the market.
However, if one were to order a Model 3 at the time of writing (August 11, 2017), the earliest estimated delivery date would be in August of 2018, with the latest estimate being February of 2019. Model S and Model X cars could be delivered in 14 days at time of writing, but with the cheapest coming in at over $88,000, the option is not feasible to the majority of consumers.
The upshot of all of this is that President Trump’s protectionist approach to promoting American companies simply will not work.
Even if all American manufacturers brought all production back into America, they would have no incentive to be great again because the competition would be forced to raise prices, thereby making them no longer competitive, allowing American marques to sit on their laurels and take advantage of a captive audience.
If America is to be made great again, and the stick method (as shown above) will be ineffectual, why not try the carrot instead?
Maybe companies would respond better to being incentivized with tax breaks or subsidies for new factories for bringing jobs back into the US rather than being punished for not doing so. Food for thought.