© White House/Benjamin Applebaum, President Donald Trump sits in a truck.2/6
- Trump has drawn the auto industry into a trade war that it doesn’t want.
- In the past, Detroit has been willing to deal with Trump, but now it finds itself in an awkward position.
- The best outcome might be for Trump to win his trade war and declare victory, while essentially nothing changes for the car business.
A few months after Donald Trump was elected President in 2016, I was at the Detroit Auto Show, and I gauged the car business’ reaction to the man.
The big three – Ford, GM, and FCA – were delighted; the foreign brands were confused.
In short order, the Detroit automakers launched an effort to have fuel-economy standards, locked in by the late-Obama-era EPA, revisited with an eye toward keeping sales of big pickup trucks and SUV elevated. Detroit scored a quick victory on that one.
On to the corporate tax cut, which the industry figured would offset any sort of border tax on Mexico-made vehicles and parts that General Motors (NYSE:), Ford, and Fiat Chrysler Automobiles needed to import. Detroit got that one, too.
Trump was basically in the bag. And then came the trade war.
The trade war that Trump always wanted
The President obviously wanted a trade war all along, not because it served any valid economic purpose but because there hadn’t been a major trade conflict between the US and a partner since Japan in the 1980s, back when Trump was headed into what can now charitably be called his business prime. Don’t underestimate Trump’s enthusiasm for nostalgia.
The auto industry was a major combatant back then, and ironically the dispute led to Japanese car companies setting up shop in the US South, employing huge numbers of non-union Americans and giving Republicans in Alabama, Tennessee, and South Carolina economic prosperity that would have eluded them if US automakers had expanded instead and American car buyers had been denied the choice of locally manufactured Hondas and Nissans.
Detroit laid relatively low with Trump in 2017 and accepted that the President would periodically attack, but also praise the industry, especially if it announced hiring and investment in the US and put the brakes on expanding operations in Mexico.
The Commerce Department has now opened a Section 232 action, allegedly to determine if vehicles imported by the US represent a national-security threat (“Beware of Germans bearing BMWs!”), but actually to stoke drama and to put Detroit in the awkward position of having to build more factories or at least hire more US workers. Or more accurately, get them to say that they’ll do these things so that Trump can get votes in the battleground Midwestern states where the big three are concentrated.
As a whole, the auto industry has blasted the move, insisting correctly that it will be bad for business and bad for consumers.
The UAW, sensing that Detroit may end up throwing money at the problem by doing some marginal hiring, has made positive statements about the probe.
The US auto market doesn’t have room to grow
There is a slight case for replaying the trade war of the early 1980s, if German, Japanese, and perhaps Chinese automakers decide to move more production to the US, as they have done in the past. BMW, for example, builds SUVs in South Carolina. Americans like BMW’s SUVs, so this makes sense.
The problem is that although some foreign brands, China-owned Volvo most recently, have followed the “transplant” script and constructed a US plant, few others want to do this because the American auto market has been at peak sales levels for three years in a row. Investing in new US manufacturing capacity would be throwing money into an impending sales downturn.
What about exporting vehicles? Clearly, it’s illogical for, say, Toyota to make cars in the US and send them someplace else. And as far as Detroit goes, the big three want to establish local-market manufacturing, and the market they all have their eyes on is China, where all the meaningful future growth should be.
The tricky thing about this dispute is that, unlike Trump’s prior attacks on the auto industry, the situation isn’t black-and-white. When Trump was demanding investment and hiring from the big three, you could look at the moves and call them clueless, given the reality of the market in the US (Trump didn’t get to have peak auto and full-employment at the same time).
Trade war theatrics
The autos aspect of the trade war fits into Trump’s raw-deal theatrics because a voter who doesn’t know anything about the car business or the European Union or Japanese or Chinese markets might believe that hefty tariffs on imported vehicles might somehow lead to better US access to new customers. The EU could, for example, drop its 10% tariff on US-made cars. America wins!
Except that US automakers have been struggling with a challenging European market for over a decade; GM just sold off its Opel division to Peugeot after years of losses. The vehicle mix in Europe — small cars and diesels — is also completely different from what Detroit builds in the US. Production in the US is also moving away from passenger cars to pickups and SUVs. The cars that Europeans favor tend to have narrow or nonexistent profit margins.
The only possible argument in favor of protecting US cars from foreign competition is that a 25% tariff that applied to German luxury cars might get Americans to buy Cadillacs instead. Except that those German luxury brands are so popular with affluent customers that they’d likely just pay up the difference.
Detroit can’t win because Trump has to
Detroit is in a fairly bad position here. It can’t do anything to support a Trump trade war because given the global nature of industry supply chains, US tariffs will always be bad for business. Hiring and capacity expansion is not going to happen. But Trump wants a win, and he doesn’t care if it hurts the industry, across the board. He can always say that they got their tax cut and this is the real price.
The more I’ve thought about this, the more I think Trump is going to do whatever he needs to do to win his trade war, now that he’s started it. So let’s assess what would happen if the EU relents and drops its 10% tariff (I don’t want to get into China and its 25% duty because Western automakers are already deeply invested there in local production).
What would happen is pretty much nothing. The American auto-export floodgates to Europe would not suddenly open. Ford isn’t going to build a new factory in Michigan to make diesel hatchback subcompacts so it can sell them at a 2% margin.
The best outcome might actually be if Trump gets the win he wants, with tariffs falling outside the US, and proposed US counter-tariffs never going up. He could then celebrate victory, and the auto industry itself wouldn’t be exposed to its cost structured being messed up. Trump could say that he alone did this for Detroit and hope that holds the line in the Midwest — but the carmakers aren’t going to undertake a hiring surge.
A reasonable person might ask why, then, we’re being subjected to all this. I think that if you have to ask, you just don’t know Trump.
FOLLOW US: On Facebook (NASDAQ:) for more car and transportation content!
Source: Investing.com
