What Trump’s Presidency Means for the Auto Industry
Is the sky falling or is that rain on the fields of American jobs?by Mark McNabb, on
Donald Trump has secured the 2016 Presidential election and will assume the duties of President of The United States of American come January 20, 2017. His presidency will likely cause tremendous shake-ups of social, economic, and political norms across the country, not the least of which is the automotive industry.
Trump has been rather vocal on his distain for several trade partnerships, saying such deals are hurting American workers by allowing jobs to move to other countries where cheap labor results in high profits for business, but fewer jobs for Americans. Ford Motor Company, in particular, has come under direct fire from Trump, specifically concerning Ford’s movement of small-car production from Michigan to Mexico.
The president-elect has promised to abolish the U.S.’ current trade deals, including the North American Free Trade Agreement and the Trans Pacific Partnership, in favor of trade deals designed to protect American jobs via import tariffs. Doing so will undoubtedly rock the economic boat, but what does it really mean for the American worker, American corporations with overseas operations, and for the price of products Americans consume every day, including their vehicles?
Continue reading for the full story.
But first, some background
President Bill Clinton signed into action the North American Free Trade Agreement, or NAFTA. It became enacted on January 1, 1994 and created a three-part agreement between Canada, the U.S., and Mexico designed to open trade borders to further business relations between the countries. Previous tariffs were lifted and businesses were allowed to outsource jobs with no threat of government interference.
For American automakers, building assembly plants and hiring skilled laborers in both Canada and Mexico became rather attractive. The lack of American unions and the lower wages demanded by Mexican workers allowed assembly costs to dramatically fall. This reduced the cost of manufacturing, which allowed for higher corporate profits and overall savings to consumers in lower prices.
The effects have been felt on both sides of the border. In Mexico, vehicle production for the U.S. has grown substantially, from making roughly three percent of U.S. cars in 1987 to nearly 20 percent of current cars available in the U.S., according to the Detroit Free Press. In correlation, automakers have pumped in more than $24 billion into operations in Mexico since 2010. Mexican jobs have increased accordingly, jumping from 122,000 in 1994 to 522,000 in 2013. Conversely, U.S. automotive manufacturing jobs have dropped from 1.2 million to 820,000 during the same time frame.
Not all U.S. manufacturing jobs attached to a now-Mexican made vehicle are shipped to Mexico. These vehicles, on average, are said to contain about 40 percent of U.S.-made parts.
Ford’s most recent move to Mexico, the one Trump kept harping on, involved building an assembly plant for the construction of the Focus and C-Max, essentially ending Ford’s production of small cars inside the U.S. The Focus and C-Max would join the Fiesta, which is already constructed in Mexico, and would add some 2,800 Mexican workers to Ford’s payroll. (Many of its trucks and SUVs are still built in the U.S. and the Focus RS is actually made in Germany.)
"We shouldn’t allow it to happen," Trump said after Ford’s announcement. "They’ll make their cars, they’ll employ thousands and thousands of people not from this country, and they’ll sell the cars right through a very weak border.... And we’ll have nothing but more unemployment in Flint and in Michigan. It’s horrible."
Ford’s response to Trump’s accusations center on jobs being maintained in Michigan. In fact, that’s how the upcoming Bronco SUV and Ranger mid-size pickup were confirmed. Both vehicles are slotted to take the Focus and C-Max’s spots in Ford’s Michigan Assembly Plant located in Wayne, just west of Detroit. Ford’s overall focus is to build its small cars, which are less profitable thanks to cheap fuel prices, in Mexico at lower costs while expanding its pickup and SUV production inside the U.S. Traditionally, pickups and SUVs garner much higher profit margins, allowing automakers the finances to pay higher wages to American workers.
Of course, Ford is hardly the only automaker building vehicles in Mexico. General Motors, FCA, Honda, Mazda, Nissan, Volkswagen and Toyota all have manufacturing facilities south of the border. According to AutoGuide, the models include the Cadillac SRX, Chevrolet Silverado Crew Cab, Dodge Journey, Ram pickups, Ram ProMaster, Fiat 500, Ford Fiesta, Ford Fusion, Honda Fit, Honda HR-V, Lincoln MKZ, Mazda2, Mazda3, Nissan Sentra, Nissan Versa, Nissan NV200, Toyota Tacoma, Volkswagen Jetta and the VW Golf.
Trump has said he will push for tariffs on imported vehicles, with rates ranging from 10 percent to as high as 35 percent. This tax would most likely offset any savings automakers are enjoying thanks to Mexico’s low labor costs. Ultimately, automakers would pass the costs onto U.S. consumers, resulting in skyrocketing vehicle prices.
Other segments of business are also firmly in Trump’s crosshairs. Carrier, a giant in the building HVAC industry, is under pressure after it unceremoniously laid off American workers and is moving its operations to Mexico. Trump’s tariffs would not only impact the auto industry, but would also have widespread affects across the American economy.
Trump’s plan to protect American workers
Trump has already announced his agenda for his first 100 days in office. It includes measures to clean up corruption in Washington, restore national security and constitutional law, enact tax cuts and simplify the tax code, repeal Obamacare, end illegal immigration, and to protect American workers. Here, directly from Trump’s website, are the seven step he says he will take.
Seven actions to protect American workers:
- FIRST, I will announce my intention to renegotiate NAFTA or withdraw from the deal under Article 2205.
- SECOND, I will announce our withdrawal from the Trans-Pacific Partnership.
- THIRD, I will direct the Secretary of the Treasury to label China a currency manipulator
- FOURTH, I will direct the Secretary of Commerce and U.S. Trade Representative to
identify all foreign trading abuses that unfairly impact American workers and direct them to use every tool under American and international law to end those abuses immediately.
- FIFTH, I will lift the restrictions on the production of $50 trillion dollars’ worth of
job-producing American energy reserves, including shale, oil, natural gas and clean coal.
- SIXTH, lift the Obama-Clinton roadblocks and allow vital energy infrastructure projects, like the Keystone Pipeline, to move forward.
- - SEVENTH, cancel billions in payments to U.N. climate change programs and use the money to fix America’s water and environmental infrastructure.
These seven steps would have wide-ranging effects on the American economy should they all happen. First, the end of NAFTA would likely incur tariffs on imported good, just as we’ve established. Secondly, an expansion on fossil fuels will likely drop the price of gasoline and diesel. Trump mentions expanding oil production and the construction of the infamous Keystone Pipeline. This drop in oil prices would fuel (pun intended) the popularity of pickups and SUVs, while negating the financial advantages of buying a hybrid or electric car.
Granted, the CAFÉ standards are still in place, but those have already come under criticism for being too strict too soon. This could quell the current push toward clean transportation, making industry titans like Toyota and Ford rethink their investments into widespread alternative energy solutions. Companies like Tesla, which relies solely on consumers wanting electric vehicles, could see demand dry up.
On the other hand, automakers could adapt to the changes by bringing manufacturing jobs back into the U.S. Lower fuel prices could push the economy forward, while making use of the upgraded infrastructure Trump is promising, and consumers would have more money in their pockets to spend on higher-priced vehicles thanks to Trump’s massive tax-cut plan. It could actually work out, but not without some growing pains.
A new age for automakers
Trump’s presidency certainly presents some interesting factors for automakers. While there is no complete certainty Trump will abolish the NAFTA act, or renegotiate it to have negative effects on the auto industry, the changes will likely be met with initial condemnation, followed by acceptance, and later with adaptation. Just as how the CAFÉ standards have changed the auto industry for the better, perhaps a renegotiated NAFTA would create more U.S.-based manufacturing jobs with more money staying inside the U.S. economy.
New car prices will rise just as they did in response to tightening CAFÉ standards. Innovation isn’t cheap and neither would a full paradigm shift of North America’s automotive manufacturing industry. But consider what the CAFÉ standards have brought to the industry. Advancements such as direct injection, widespread turbocharging, six- eight- and 10-speed automatic transmission, hybrid and electric vehicles, the use of lightweight materials, and vehicle aerodynamics that would have been unimaginable 30 years ago. Even GM’s small-block V-8 has kept up with the times and can achieve 29 mpg highway in the current Corvette Stingray.
Perhaps the price is worth it. Maybe, just maybe, the renegotiation of NAFTA will work out. The sky may appear to be falling, but through the broken pieces are sure to come drops of long-term economic growth and industry advancements. We can only hope so, right?