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Donald Trump’s war on cars is pushing the US closer to a recession

Donald Trump’s war on cars is pushing the US closer to a recession

New taxes on Mexican goods would be the latest blow to automakers, and would come at a precarious time

When President Donald Trump announced new tariffs on Mexican goods this week, he delivered the latest blow in a war he’s waged on automakers since before he was elected. It’s not a given he’ll follow through on the threat, or that he’ll implement other tariffs he’s dangled over cars coming into the country Europe and Japan. The US and Mexico could also reach a deal before they go into effect on June 10th. But as he continues to escalate his fight against foreign-made cars, some experts think the US will move closer to another recession.

The tariffs are on “all goods” coming to the US from Mexico, but they’d likely hit the auto industry hard. If they escalate to the 25 percent cap Trump proposed, and the automakers absorb the entire cost so as not to pass it onto consumers, it could cost General Motors (GM) $6.3 billion, Fiat Chrysler Automobiles (FCA) $4.8 billion, and Ford $3.3 billion, according to a Deutsche Bank estimate. While it’s unlikely that automakers will eat the entire cost, the figures help explain what’s at stake. By the end of Friday, the threat of the tariffs alone had already wiped out about $17 billion of market value from the world’s biggest automakers.

Many of those automakers assemble cars in Mexico to be sold in the US, or build cars using a mix of Mexican-made parts. In 2018, Mexico exported $93 billion in vehicles and parts to the US. Major foreign automakers like Audi, Toyota, Nissan, Honda, and Mazda assemble cars in Mexico, many of which are destined for sale in the US. A number of top-tier suppliers like Denso are also located in the country.

On June 10th, the United States will impose a 5% Tariff on all goods coming into our Country from Mexico, until such time as illegal migrants coming through Mexico, and into our Country, STOP. The Tariff will gradually increase until the Illegal Immigration problem is remedied,..

— Donald J. Trump (@realDonaldTrump) May 30, 2019

But those “big three” American automakers might be most at risk. More than a quarter of GM’s domestic Chevy and GMC brand sales in 2018 were from vehicles assembled in Mexico, according to Cox Automotive. And almost 40 percent of Ram trucks sold by FCA were built in Mexico. Ford is less exposed by comparison, but about 10 percent of its total US sales come from Mexican imports.

The tariffs put automakers in a tough spot: either they absorb the added cost or they pass it on to their customers, says Michelle Krebs, an executive analyst at Cox Automotive’s Autotrader. Since profit margins are already thin in the auto industry, it’s unlikely they’ll eat the full cost if the tariffs go into effect, and especially if they rise. That likely means that the prices of cars will go up, and sales could go down.

GM, FCA, and Ford all declined to comment, instead referring to trade groups like the Auto Alliance and the American Automotive Policy Council.

“[Tariffs] are a tax on our customers, which means they’re harmful to our nation’s economy and the millions of American jobs that depend on cross-border trade,” Auto Alliance interim president and CEO David Schwietert said in a statement provided to The Verge. “Any barrier to the flow of commerce across the US-Mexico border will have a cascading effect — harming US consumers, threatening American jobs and investment, curtailing the economic progress that the administration is working to reignite, and potentially stalling efforts to ratify the agreement in Mexico, Canada, and the US Congress.”

Trump originally said he announced the new tariffs this week because he wants Mexico to stop immigrants from crossing into the US illegally. Citing the International Emergency Economic Powers Act, Trump announced late Thursday night that the US government will place a 5 percent tax on all goods coming into the country from Mexico starting June 10th. The tax, according to an official White House statement, will increase to 10 percent on July 1st, 15 percent on August 1st, 20 percent on September 1st, and ultimately reach a cap of 25 percent on October 1st.

If, at any point, “the illegal migration crisis is alleviated through effective actions taken by Mexico,” the White House wrote, the tariffs will be removed. The White House did not describe what those “effective actions” might look like, though, and said only that they would “be determined in our sole discretion and judgment.”

But Trump admitted the tariffs are also about forcing automakers to move their manufacturing efforts to (and in some cases, back to) the US. “In order not to pay Tariffs, if they start rising, companies will leave Mexico, which has taken 30% of our Auto Industry, and come back home to the USA,” he wrote on Twitter Friday.

It’s very unlikely that will happen, according to Krebs. “An automaker is not going to just all of a sudden say ‘I’m not going to produce vehicles in Mexico’ and move all that production to the US,” she says. “It’s just not that simple.” Moving manufacturing to a new plant in the US would cost billions of dollars and take years to pull off, even if automakers were to return to shuttered plants like the one GM recently left in Lordstown, Ohio. “I would not expect anybody to change production plans,” says Krebs.

The same probably goes for the supply chain companies in Mexico, according to Doug Betts, the head of JD Power’s global automotive division. “[These] are not things that change or can be changed overnight at all,” he says.

Betts also says that, even if automakers were willing to move to avoid tariffs, it’s not a given that they would move manufacturing back to the US.

“If you’re an automaker, and you think this is the way it’s going to be for the next 10 years, you say ‘hey, we can’t we can’t live with this, we can’t pay a 25 percent tariff, so we need to start moving them somewhere else where they won’t be so expensive,’” he says. “But that somewhere else might not necessarily be the United States. It could be India or Africa or who knows what.”

In order not to pay Tariffs, if they start rising, companies will leave Mexico, which has taken 30% of our Auto Industry, and come back home to the USA. Mexico must take back their country from the drug lords and cartels. The Tariff is about stopping drugs as well as illegals!

— Donald J. Trump (@realDonaldTrump) May 31, 2019

Repatriating manufacturing has been a goal for Trump since well before he took office. For years, Trump has slammed companies across a number of industries for outsourcing manufacturing jobs to other countries, like when he famously shamed heating, ventilating and air conditioning manufacturer Carrier for trying to move production to Mexico during the 2016 presidential campaign. Carrier initially appeared to capitulate, and Trump claimed victory — before Carrier ultimately moved hundreds of jobs to Mexico anyway.

Trump has particularly focused his rage on the auto industry, though. GM, for instance, is a popular target for him. The automaker announced in late 2014 that it planned to invest $5 billion in Mexico over the next six years, even though it already had four complexes with 14 manufacturing facilities in the country. So early on in his campaign, Trump tried to get GM to establish manufacturing facilities in lower-wage US states instead of leaving Michigan for Mexico.

GM didn’t back down from its Mexican investment plans, though it agreed to invest $1 billion in the US in 2017. But in 2018 the automaker announced it was closing multiple US plants and laying off thousands of workers. Trump fumed, and has spent the intervening months sparring publicly and privately with GM CEO Mary Barra about the closures. In May, Trump touted the “GREAT NEWS” that GM was in talks to sell one of the plants, but it turned out the potential buyer is a startup that is in serious financial distress.

GM is not Trump’s only target. In April 2016, Ford announced plans to spend $1.6 billion to build a factory in Mexico where it would make small cars like the Fiesta and the Focus. It had also previously announced a separate plan to invest $2.5 billion in new engine and transmission manufacturing facilities in the country. Trump’s reaction in June 2016 was to threaten Ford with a 35 percent tax on its Mexican exports.

Trump continued to criticize Ford’s Mexico plan even after he became president. Ford finally scrapped the plan in 2017 — only to turn around and announce that it would build the cars in China. Then, in 2018, Ford announced it would stop selling the Focus in the US entirely due to Trump’s budding trade war with China.

More recently, the president has lashed out at global automakers. He’s threatened similar 25 percent tariffs on cars imported from the European Union and Japan, and claimed that cars and parts brought in from other countries are a national security threat.

Some of Trump’s other trade policies have also hurt the auto industry. His tariffs on steel and aluminum cost GM and Ford about $1 billion each, and Fiat Chrysler around $500 million.

This week’s move, then, is just another salvo in a now years-long war Trump has waged against automakers and suppliers who don’t directly serve up jobs in the US economy. And it’s all coming at a precarious time for the auto industry, Krebs says. Overall, vehicle sales in the US have slumped since reaching a record of 17.55 million in 2016, and the situation isn’t much better in other global markets. The average selling price of cars in the US is near all-time highs, thanks largely to the increased popularity of SUVs and trucks, which tend to cost more. And American consumers owe a record $1.27 trillion in car loans, and more of them are late on their payments than ever before.

Add all this to the trade war with China, potential taxes on cars coming from the EU and Japan, and now the ones on Mexican goods, and the US could be dealing with “a perfect storm,” Krebs says. “Or an imperfect storm, really.”

“We’ve always said if all if all these tariffs that have been proposed go into effect it could push the economy into a recession,” Krebs says. “It not a huge potential, but it is increasing.”

Betts is similarly cautious about jumping into panic mode, particularly because automakers haven’t cut prices yet despite the dip in sales. So he’s watching to see if that happens.

“When everybody gets in a war to try to save their [sales] volume, prices go down, and then the auto companies lose money and then they have to idle plants, and take drastic action,” he says. “And that’s what turns into a recession, because when you send 10,000 people home for a month, they all have to tighten their belts.”

If Trump’s tariffs on Mexican goods never materialize, or if the two countries find some kind of agreement on immigration, that would help avoid putting extra pressure on the economy, both Krebs and Betts say — even if it likely won’t stop him from warring with automakers over where they build their cars.

But even in that situation, Trump’s latest threat might wind up hurting the economy another way. The US has spent months negotiating the USMCA, Trump’s replacement for NAFTA, which he tore apart at the end of 2018. Just this week, vice president Mike Pence was in Canada putting the finishing touches on USMCA, while Mexico’s new president readied the deal for ratification in his own country. By announcing new tariffs on Mexico while all this was happening, Krebs says Trump is jeopardizing the ongoing trade talks with the rest of the world.

“We’re negotiating all kinds of other trade agreements with Japan with Europe and China that affect the auto industry,” she says. “How does that sit with them, that we negotiate a deal, and now we’re changing it?”

This content was originally published here.

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