Why Trump's plan to tax cars built in Mexico is un-American

VW CameraMatthew DeBord/BIThe legendary VW Beetle, new version.

President Donald Trump has espoused an “America first” manufacturing policy and pushed it hard on the US auto industry.

Both Ford and General Motors have endured attacks from Trump about their operations in Mexico, where automakers from around the world have established factories to export vehicles both to the US and other markets.

Trump wants a build-it-here-sell-it-here approach because he stands to benefit from hiring and manufacturing in battleground states such as Ohio, as well as in Michigan, a state he unexpectedly carried in the election. These are states he has to win in 2020 — he must make good on his promises to blue-collar workers or face blowback.

Mexico’s lower labour costs and growing auto sector have made it attractive to carmakers. But it’s not as if the auto industry just discovered that it’s a good idea to built cars and trucks south of the US border.

Major automakers have operated plants in Mexico since the 1930s, with companies such as Ford and Volkswagen later adding factories that have been around since the 1960s. The business logic is compelling: by manufacturing vehicles in Mexico, carmakers can serve that market and export vehicles to the US, depending on demand.

Remember the VW Bug

A classic example is the legendary VW Beetle. According the Bloomberg’s
Ryan Beene and Christoph Rauwald:

Much of Volkswagen’s North American output comes from its sprawling Puebla plant in central Mexico. The factory opened in the 1960s to produce Beetles and is the company’s biggest outside of its hometown of Wolfsburg, Germany. Puebla has capacity to build about 600,000 Jettas, Golfs and Beetles a year.

Beene and Rauwald noted that this level of commitment to Mexico is awful for VW’s business in the event that the Trump administration implements a border tax on imports.

But there’s a deeper problem, and it goes to the heart of why the US auto market is the most competitive in the world.

Literally, for decades, Americans have benefitted from the highest level of choice for car buyers anywhere on earth. The VW Beetle is representative: when it first went on sale in the US in significant numbers in the 1960s, Germany’s World War II defeat was little more than a decade old. The country urgently needed to rebuild itself as a manufacturing power, and the little “people’s car” fit the bill perfectly. With American roads full of huge sedans, the Beetle was a surprise hit, going on to sell millions and validating the concept of a small, affordable vehicle.

Baja BugDevkotlan Photography/Wikimedia CommonsThe original Beetle sold millions and did service as a dune-buggy racer, among many other things.

Eventually, Japanese automakers, also recovering from the war, would follow VW’s lead.

American consumers benefitted immeasurably from this. For forty years, we’ve been able to buy small cars, big cars, and everything in between. Relentless competition has hurt the Detroit Big Three, but there’s no question that Ford, GM, and Fiat Chrysler Automobiles have vastly upped their games. And Mexico has played an integral role in that process, particularly since the mid-1990s.

Preserving choice

The main argument for the US carmakers who now want to send some production to Mexico is that they can’t profitably produce small vehicles at their US factories, given that Americans are buying more SUVs, crossovers, and pickups. But the Big Three — and the so-called foreign “transplants” in the US from Germany, Japan, and South Korea — are reluctant to bail out on small cars, having learned a hard lesson when gas prices spiked toward $5 a gallon less than ten years ago.

Mexico presents them with the ideal safety valve.

Sadly for Trump, the automakers aren’t going to build any additional factories or commit to major hiring in the US because the market here is currently running at a peak sales level. Adding additional capacity would be reckless — the factories would either be idled or canceled when the sales downturn comes, and any new workers would be laid off.

Hiring in the US and building in the US just to appease the President, with the full knowledge that such actions are unstable, isn’t very American. Detroit doesn’t want to set up workers for a fall.

And the industry overall doesn’t want to reduce the number of choices that American consumers have when it’s time to buy a car. They want to capture the customer who wants the compact sedan as well as the buyers who need a full-size pickup truck.

Consumer choice defines the US auto market. Mexico plays a critical role. So if Americans want to retain what they have come to expect when it’s time to buy or lease a vehicle, they will think twice about whether “America first” makes sense.

This is an opinion column. The thoughts expressed are those of the author.

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