- President Donald Trump is pushing his luck with his latest tariff threat against Mexico, which would hurt the US auto industry.
- Detroit has been as diplomatic as possible with Trump, giving him transactional wins and accepting losses in return for a big corporate tax cut and rollbacks on federal fuel-economy standards.
- If the US auto market turns south, Trump could see this relationship rapidly sour.
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The president has a problem. He’s both historically unpopular and polling badly against Democratic frontrunners for the 2020 election.
So he keeps playing his one hand: tariffs. After putting the US on what appears to be a continuous trade-war footing with China, he’s now decided to clonk Mexico with entry-level 5% tariffs on imported goods (that could rise to 25%), allegedly to penalise the country for lax immigration controls (never mind that Mexico’s US border problems are caused by Central American countries, over which Mexico has limited influence).
The trade situation with Mexico was supposed to have been resolved by the replacement of NAFTA with the United States-Mexico-Canada Agreement last year, but evidently that pact didn’t offer President Donald Trump a means to punish Mexico in the eyes of his right-wing supporters, who make no distinctions when it comes to immigration specifics: It’s all bad.
The US auto industry, over several decades, has spread its supply chain across North America, with vehicles and parts flowing back and forth across both the northern and southern borders. When Trump was elected, Detroit assumed it would have to deal with a border tax. Later, it developed a relatively optimistic perspective on the NAFTA rework, which preserved much of the old arrangement.
Giving Trump tweetable headlines
In return, GM and Ford, in particular, have made every effort to give the president tweetable headlines, investing in US manufacturing even as they have shuttered factories and going to bat for the Trump Environmental Protection Agency as it seeks to roll back Obama-era regulations on vehicle fuel economy and emissions.
The CEOs of major automakers are well-schooled in international business practices, but they’re also adept at politics. GM especially can sometimes seem as if it’s actually a country, deploying diplomacy as much at it tries to sell more cars and trucks.
Trump is not well-schooled in international business practices. His entire career has been as the head of a small, scattered family business and more recently as an entertainment and branding personality.
Trump is also a nearly pure transactionalist. GM solved his and GM’s problem with an idled plant in Ohio by coming up with a face-saving way to sell the plant to small manufacturer of electric delivery vehicles, possibly saving some jobs but more importantly giving Trump the chance to tweet about how he got GM to save some jobs in the Buckeye State, which he carried in the 2016 election and needs to carry again in 2020.
The payoff lasted a few weeks. In between that prospective deal being announced and Mexico tariff day, GM CEO Mary Barra went to the GOP stronghold of northeastern Indiana – Vice President Mike Pence’s home state – to unveil a $US24 million investment in a pickup-truck plant. GM has already pumped over a billion dollars into the factory.
There are no win-wins with Trump
The important thing to remember here is that there are no win-wins with Trump. There are only wins, singular, for the president. Everybody else loses. (The auto industry thought it had garnered a lopsided win when Trump went after the Obama EPA’s goals, but that turned out to be a fleeting victory.)
OK, that’s not 100% true. GM and other big corporations continue to benefit from the massive tax cut enacted in early 2018, and relatively robust economic growth isn’t hurting, either, alongside historically low inflation. In business, that all adds up to real equity and political capital, and Trump could argue that he deserves credit for it. He has a lot more of it to spend, so expect the auto industry to be pretty compliant with his whims.
These companies should therefore be down with having their supply chains and operations threatened for some time – until a sales downturn hits, which is it always does. There are already some signs the all-important US market, which has posted record sales for four straight years, is backing up a bit. Not tanking, and high-margin truck sales should compensate for weaker deliveries of cheaper vehicles. But not booming, either.
At that point, which could arrive next year, Trump might be a coin flip for reelection. Even if he wins, he’ll get two years before he’s a lame duck, and by then the US could be in recession, with Trump’s trade preoccupations no longer indulged by a strong economy.
Then Detroit isn’t going to be so diplomatic. Remember, a Trump presidency is at most an eight-year deal, while Ford and GM have been around for more than a century. They got started when Teddy Roosevelt was in the White House. Trump may actually make more progress against China, with its thousand-years-of-patience tactics but vulnerability to being cut off from US markets, than with hundred-year-old car companies that have made it through two depressions and two world wars.
In the end, Detroit can absorb tariffs and adjust supply chains. But there’s a cost, and that’s to the American consumer. And if they can’t shell out to buy more expensive, tariff-priced vehicles, then Detroit will have to lay off workers.
Who, it should be noted, could also be Trump voters.