Will Donald Trump Force a Mexican Standoff With Detroit?
From Saltillo to Shanghai, Trump’s machinations on trade could have far-reaching effects.
Minutes after Donald Trump stunned the world Tuesday night, winning election as the 45th President of the United States, Ford Motor Co. announced it would cancel a controversial plan to shift small-car production to Mexico. General Motors dropped its own $5 billion Mexican investment, and Fiat Chrysler followed suit. FCA CEO Sergio Marchionne said that the company would not only keep small-car and Jeep production here, but would build sparkling factories in Michigan, Ohio and Pennsylvania to meet Trump’s demand for American-made cars.
“I’m confident that American consumers will be willing to pay much more for cars that are manufactured here, and that provide good-paying jobs for their families and neighbors,” Marchionne said. “As for our international partners, suppliers and shareholders: Never mind.”
Of course, none of those things actually happened. I’m just joking (or not)—a habit I picked up from Mr. Trump himself. And that’s what makes it difficult to judge what Trump’s election means for the auto industry. For one, Trump has vowed to scrap the North American Free Trade Agreement that opened the door to Detroit’s south-of-the-border, duty-free Maquiladora plants.
But how serious is Trump? Which of his campaign planks were sincere, and which were political opportunism, designed to blenderize his base into an anti-Mexico, anti-immigrant, anti-globalist froth? During the campaign, Trump picked a Twitter-spat with Ford over the company’s Mexican bean-counting. He pledged to stop Ford from opening a $1.6 billion plant north of Mexico City, in part by threatening to tax or slap tariffs on Mexican-made Fords.
His slogans were largely misinformation—no American jobs would be lost to the new Mexican plant—but the message surely resonated with some aggrieved voters, who felt disrespected and lost in an industrial wilderness. As Yogi said, it’s déjà vu all over: Michiganders, including my late, auto-factory-working father, shocked the pollsters once before, rejecting the liberal and union establishment and voting Reagan in 1980. Our Macomb County, on the 8 Mile border with Detroit, actually gave birth to the phrase “Reagan Democrats.” Fast forward to 2016, and credit or curse Trump Democrats—blue collars who usually deliver blue votes—for helping him run the table in the Rust Belt. Trump’s win also illustrates the waning power of the United Auto Workers and other unions, whose tepid support of Hillary Clinton clearly didn’t sway the rank-and-file.
Then there’s the matter of priorities. Won’t Trump be too busy building a literal Wall at the Mexican border to erect a figurative one and stop Ford Focuses and Fiestas from slipping through? Trump's economic advisors might also remind him that a huge chunk of Detroit’s profits is coming from smart long-term investments and sales in China and other international markets—markets that won’t respond kindly to Trump’s threats of tariffs and old-school protectionism. The Chinese communist party loves its Buicks, but it can easily switch to BMWs and freeze out GM as their first shot in any trade war. As for Asian makers, stock prices for Toyota, Nissan and Honda, all with their own Mexican party plans, tumbled sharply in the hours after the election.
Now, between immigration and ISIS, Trump may end up too distracted to spend much time on complex trade issues. But with the GOP firmly in control of the House and Senate, he may be able to float and implement plans to his hearts content, from trying to dismantle Obamacare to, I don’t know, bringing casino gambling to the Crimea. (“Trump Presidential Palace” has a nice ring to it).
American auto factory jobs have surely dwindled, by one-third over 20 years, even as manufacturing jobs in Mexico have exploded. Spurred by 1994’s North American Free Trade Agreement, Mexico’s share of North American production has grown to 20 percent, while the United States share will fall to 60 percent over the next few years, down from 70 percent in 2011, according to the Ann Arbor, Mich.-based Center for Automotive Research (CAR). Trump would surely call that a disaster. But Dave Andrea, CAR’s executive vice-president of research, says the picture is more complex. The North American market is approaching record, robust capacity, the ability to produce 20 million cars a year for sale around the world.
“Even though the U.S. share of total NAFTA production is falling, the total pie is growing,” Andrea says. That pie includes Southern cookin’, a dramatic shift of production and jobs to foreign-based automakers in the American South that include Toyota, Nissan, BMW, Mercedes, Hyundai and now Volvo and Volkswagen. This complex, interconnected web of production, parts, costs and contracts “is all based off the assumption of free and open trade,” Andrea says, including a transparent border for truck, rail, air and water shipping.
“As the new administration gets through the transition and looks at how interwoven the global automotive supply chain is, they may take another look,” Andrea suggests. He further notes that there are fewer jobs to fight over, no matter where a plant is located. A modern factory can churn out up to 300,000 cars a year with only about 2,500 workers, one-third the employees of a plant 20 years ago.
While Trump may not be able to unwind NAFTA, he has already trained his skeptical sights on the Trans Pacific Partnership, which has yet to be implemented. Then there's the Transatlantic Trade and Investment Partnership (T-TIP). The American auto industry is keen on this deal with the European Union that might open the door to harmonized safety standards, Andrea says. Global automakers could design platforms and models that don't require re-engineering or safety certification to be sold in both markets, saving enormous costs. Mexico already has a similar deal with the EU, another potential competitive edge in a global world.
As for Trump’s tariff threat, Andrea says a tariff can theoretically be absorbed by the automaker, suppliers or dealers without passing too much to customers. But it’s tricky. Some economists suggest that Trump’s trade plans, if fully implemented, might add several thousand dollars to the price of a car. Let’s not Bondo-coat the potential dents in that strategy. Most Americans don’t like paying $2 extra for their WalMart khakis, let alone $2,000 more for a Ford. Small cars are especially price-critical, as budget shoppers scour the Internet for a sweet lease deal or a few dollars in savings. Economists at automakers say that even a $200 price increase on a budget model, or a similar price disadvantage against a competitor, can play hell with sales.
Our president-elect came to power as a businessman, not a politician. Now he's a politician who'll be forced to do business, from Wall Street to Main Street, and neither he nor we know much about the particulars. We do know that the man who used Chinese steel to build his towers wants you to buy American sheetmetal. That's no joke. Or is it?