This Means (Trade) War: Trump Plays a Dangerous Game With Auto Tariffs
Someone needs to tell the President that "foreign" and "domestic" have become meaningless terms for today's global automakers.
In the looming trade war that would roil the global auto industry, its fuse lit by President Trump’s bluster and threats, it’s pretty clear who Trump thinks he’s hurting: Foreigners. As in, Those Damn Foreigners.
But with China and Canada already launching retaliatory strikes over steel and aluminum tariffs, Trump’s latest, indiscriminate attack on globalism and free trade—the threat of onerous tariffs on imported cars and components—is an attack that knows no borders. Because the auto industry, increasingly, has no borders. Everyone would suffer: Car companies, whose factories and suppliers span the globe. Consumers, who already often stretch to afford a new car, and who mostly don’t give a damn where it’s built or where the profits end up.
Let’s put the President’s proposed, 25-percent tariffs into Art-of-the-Deal language that anyone might understand: Would you pay $60,000 for a German-imported, BMW 3-Series for which your brother-in-law recently paid $48,000? Not now, and not ever. To a lesser extent, the tariffs would likely raise the cost of every vehicle sold in the United States, including Toyota’s estimated $1,800 price hike for the American-made Camry. As Toyota said, consumers who buy Camrys, and mainstream cars like them, are most vulnerable to price hikes. The average buyer is paying just over $26,000 for their Camry, according to Kelley Blue Book. Ask them to pay $28,000 for the same car, and you’re looking at one glum, unconfident consumer—or 387,000 consumers, that being the number of Camry buyers in 2017.
Trump keeps acting like he's doing a solid for homegrown companies like General Motors, and its workers. Yet GM sees nothing but dangerous curves ahead. In a surprisingly forceful filing with the Commerce Department, GM said that "Increased import tariffs could lead to a smaller GM, a reduced presence at home and abroad for this iconic American company, and risk less—not more—U.S. jobs.”
In other words, thanks but no thanks. The crazy part is that GM and other "domestic" automakers haven't been clamoring for protection from imported cars, as Detroit did in the Seventies when it faced its first existential threat from Toyota and Honda. Why should they, when a company like Ford makes a good 80 percent of its domestic profits from a single model? Hint: It’s not a car at all, but the F-Series pickup, already safely cocooned by America’s 25-percent tariff on imported trucks.
The president’s trade advisor, the ever-impolitic Peter Navarro, scoffed at GM’s claim of higher prices and a hamstrung company. Any price hikes, in his breezily glib take, would be on par with “a luxury floormat.” But even if automakers can absorb some tariffs without passing the full cost on to customers, Navarro’s statement betrays a shocking ignorance of the industry, and how incredibly price-sensitive consumers are. Ask any carmaker: A price hike or competitive disadvantage of as little as $200 dollars, especially in budget-priced, Internet-shopped models, can send consumers racing for a better deal elsewhere.
The industry’s top lobbyist, the American Alliance of Automobile Manufacturers, can be prone to exaggeration, but their numbers here aren’t far off the mark: The proposed tariffs would constitute a de facto $45 billion annual tax on car consumers. The Alliance says that would lay waste to new-car sales, forcing automakers to shutter factories and lay off workers. Tariffs and trade wars are a lousier idea today than ever. But as Toyota noted, now's a particularly bad time, with the auto industry facing slack demand and a few tough years after a historic run of sales. Kneecap the auto industry, which employs about six million people overall—about 90 times more jobs than the coal industry that Trump obsesses over—and you could kneecap the entire economy. There are already troubling warning signs of a looming contraction or even another recession, including bond yield curves that are a surprisingly accurate predictor of economic malaise.
Most insultingly, Trump has the Commerce Department investigating whether “foreign” automakers are a national security threat to America. He expects his answer, neatly rubber-stamped, in a few weeks. Perhaps he could just put in a call to working folks in Georgetown, Kentucky, Smyrna, Tennessee, or Spartanburg, S.C.—to name just three cities in states that Trump carried in the election. Those respective cities are where Toyota builds the Camry; where Nissan assembles some 600,000 cars a year; and where BMW cranks out more SUVs than any of its plants around the world. I imagine those people would be surprised to learn that the companies who provide their paychecks and feed their families are on Trump’s ever-expanding enemies list. How, they would surely ask, would a trade war improve their lives, and those of working people throughout America, including the millions who cast hopeful votes for Trump?
As every industry and Wall Street analyst worth the name is warning—no, not Navarro, who already guessed wrong on metal tariffs—stiff auto tariffs would set off major retaliation from other nations that will only crimp U.S. exports and jobs. Those BMW SUVs that roll out of South Carolina? BMW exports them to 140 countries. In fact, international automakers, meaning those not headquartered here, now account for 47 percent of U.S. light vehicle production. Roughly five million cars rolled off their American assembly lines last year. In today’s economy, a neural network made up of billions of links and trillions of transactions, there can be no trade position in which only America “wins,” and everyone else gets crumbs. Who, and what, are you gonna tax? How do you separate all those infinite strands? FiatChrysler is headquartered in Italy. Among made-in-America cars that contain the most U.S.-sourced parts, the Top Five are all from…Japanese companies. The Camry often leads that list, but we’re still talking just 75 percent of its parts total, with the other 25 percent sourced from abroad. GM’s dizzyingly complex parts chain includes some 20,000 suppliers around the globe.
Let's not forget our biggest trading partners to the north and south. Automakers, including from my Detroit hometown, imported nearly $90 billion worth of cars from Canada and Mexico last year. Those imports, and their border-crossing components, are exempt from tariffs under the trilateral North American Free Trade Agreement. But if the administration succeeds in tearing up even that plan, look out.
Naturally, international automakers aren’t taking kindly to being singled out or punished for their leading role in American job creation over the past four decades, largely in the non-union, "right-to-work" Deep South. As Detroit’s Big Three shuttered innumerable plants in America, shed jobs or outsourced them to lower-cost countries, these "foreigners" stepped up and filled the gap. One might say that these companies "liberated" cities like Marysville, Ohio, saving them from unemployment, ruin and opioid addiction. How about a "Thank you," Mr. President?
Toyota said that, “A hundred and thirty-seven thousand Americans support their families working for Toyota, and Toyota and Lexus dealerships. They are not a national security threat. Indeed, Toyota operates 10 manufacturing plants in the U.S. We are an exemplar of the manufacturing might of America."
Echoing that patriotic sentiment, GM said that America’s security is tied in part to the fortunes of major employers like GM, part of an industry that generates about 3.5 percent of U.S. GDP.
Now, in defense of Trump’s basic idea, if not his willy-nilly approach, the No. 1 reason that foreign automakers have built so many SUVs here is that notorious “chicken tax.” Looking to protect its farmers, Europe slapped big tariffs on imported, frozen chicken parts in 1964. The U.S. retaliated, slapping their own 25-percent tariff on light trucks—pickups, and later SUV’s and minivans—and it’s been in effect ever since. That chicken tax (along with generous loopholes for light trucks in fuel economy rules) allowed Detroit to virtually corner the market in pickups, and enjoy a humungous price advantage in SUVs. Yet it also forced the hands of international automakers, spurring them to open their own SUV and pickup factories in tariff-free America. That list now includes Toyota, Honda, Nissan, Mercedes, BMW, Hyundai, Kia, and just recently, Volkswagen and Volvo.
Certainly, troubling trade barriers to American-made cars still exist, especially in Japan and the European Union. But the way to deal with those barriers is patient, nuanced negotiation—the kind of deal-making in which every nation or trade partner feels like they walked away with something, or at least didn’t get screwed. But that kind of respectful, worldly, win-win strategy is anathema to Trump, to which every negotiation is a zero-sum game, followed by a boastful taunt for the “losers” on the other side.
Whether or not Trump follows through with his dangerous game on tariffs, every industrial CEO should be taking notes. A full collective of global automakers has been cozy and co-dependent at the White House, as long as Trump was helping them gut fuel economy and climate-change rules. Now, GM’s Mary Barra and others must see that Trump’s pat on the back can become a backstab virtually overnight. Ask Harley-Davidson. This iconic brand and company, a V-twin-for-victory symbol of American attitude and culture around the globe, is seeing its patriotism impugned and its business, shareholders, and employees under assault from an American president.
Now, one or two readers will grouse that they didn’t come to The Drive to read about politics. First, everything is politics. And when a government policy threatens to radically affect the industry that we cover—and the livelihoods of everyone in that industry—you can bet we’re going to sound off. Feel free to disagree. If you just came here “for the cars,” perhaps read a review of the Audi Q5 you were interested in buying. Oops, that would be the Q5 whose price tag would soar by at least $10,000 under the tariff plan. Now, what was that about politics?
Sorry, but we are witnessing the unprecedented spectacle of an American president who seems not only willing, but eager, to punish and humiliate longtime allies, to threaten companies foreign or domestic, and to play a dangerous game of brinksmanship with the world economy—all based not on facts or strategy, but on his ever-changing moods and bottomless need for affirmation. His corporate courtiers hold out hope, but they've got to be scared shitless now, knowing there's nothing more to it than: bow, flatter, and kiss Trump's ring, and you're in.
But never for long. Run your business as you see fit, speak truth to power, or bruise Trump's ego, and this president will look to smash you, like a vindictive toddler with a dangerously oversized hammer. When it comes to the auto industry so far, Trump fortunately shown a weak grasp, poor aim, and a two-second attention span. Oh, but he's paying attention now. And considering the size of that hammer, there's still plenty of time for Trump to smash things up.