THE INSIDE MAN

Trump and the future of the US auto industry

Trump and the future of the US auto industry image

Tito F. Hermoso / General Motors, Chrysler, Ford, Volkswagen | April 10, 2017 06:20

How Trump thinks he is doing the US auto industry a favor

Perhaps in the entire history of US Presidents, none has been more obsessed with immediately fulfilling all his campaign promises as much as Donald Trump. Not only has he jumped into action, like the omnipotent all powerful tycoon in “The Apprentice” reality show, he has demanded instant results.To make his “America Great again” campaign come true, he is promising more American jobs by reclaiming jobs that have gone abroad and ejecting immigrants from “stealing” American jobs. He wants to put an end to “unfair” trade deals that put America in deficit. He wants to stop massive spending on America's defense and aid commitments abroad and channel those funds to the American economy.

The losers strike back

Trump's idea of a better America, “America First” as he puts it, is a withdrawal from globalization, from being the World's only superpower because he believes America has been taken advantage off and she will no longer play the fool. Historically, and despite its enormous prosperity due to engagement with the world economy, the USA has always entertained its isolationist/xenophobic [selfish] bent. The last time this happened was when America unilaterally imposed the Smoot-Haley tariffs, which punished countries engaged in world trade and all nations who didn't bend its will to American imperialist wishes, plunging the world into the Great Depression and igniting the embers that would explode into World War 2. Trump's America First policy is the next extremist step from the gringo-machismo-jingoist Cheney-Rumsfeld doctrine [anything goes as long as its on America's terms] during “W” Bush's two terms.

Trump and the future of the US auto industry

Uncertainty

As a bellwether of the American economy, the US auto industry, long dependent on foreign supply chains and access to foreign markets is watching all of this with baited breath and uncertainty. Long established globalization plans are being pushed forward before Trump's enactment of trade restrictions while domestic manufacturing is being revisited.

Legend in his own mind

Within days of his oath taking, Trump's world of alternative truth cum PR spin, while always cocooned with a baying crowd, preaching to the choir, proudly proclaimed that Ford has cancelled an expansion of Ford Focus production in Mexico. In a typical Trump credit grab, he pointed out that it was the immediate fruit of his policies of bringing back American jobs. But typical of what the USA is now getting used to [government policy by tweet, alternative “facts” and unsubstantiated sweeping conclusions] this “increase” in jobs at the expense of foreign investment withdrawal is only half the story.

Trump and the future of the US auto industry

Reality bites

By Ford's own admission, the expansion of Focus production in Mexico was dependent on forecasts sales. Now that the Federal Reserve will raise interest rates, world economic growth will surely dampen; hence Ford postponed Focus production expansion. Ford is expanding Fusion production in the USA in exchange for maintaining Focus targets in Mexico. This has nothing to do with Trump's ascension as Ford, like any large multinationals, plan their investments and expenses years in advance. The production of Ranger and Bronco in Michigan is due to existing State incentives that have been in place for decades. Likewise State incentives that got VW, BMW, Mercedes and Toyota to build cars in Tennessee, North Carolina, Alabama and Texas respectively have been staple “sweeteners” to attract foreign investments for ages.

Wall Street rules the bottom line

Like any multi-national listed on the Stock Exchange, Ford is beholden to satisfy its public owners/funders in Wall Street. To this end, Ford manufactures cars wherever it meets high demand and least costs. It is duty bound to maximize the efficiency of capital, the money which citizens invest in the publicly traded stock of Ford. Like all modern companies, Ford, is heavily invested in labor saving technologies and importing parts from more economically efficient countries. Trump's “lost” jobs of America is not entirely due to foreign competition or foreign transplants but by irrevocable replacement by safer and more modern production techniques like robotization. Earlier on, Trump patted himself on the back for the jobs he “saved” at a consumer white goods facility that was about to be closed, but an unpublicized fact was that the same company closed factories in other States, losing four times as many jobs as the jobs Trump claimed to have “saved”.

Trump and the future of the US auto industry

The tax that backfires 

As for production differentiation, BMW, VW, Mercedes and Toyota concentrate its SUV production in the USA simply because it is the largest market for such largish vehicles. Micro cars and small MPVs are not popular in North America, hence, such cars are made elsewhere. This is certainly either unknown or disregarded by Trump himself when he accused Toyota and BMW for selling vehicles, made elsewhere, to the US market. To “punish” these countries – note not foreign companies but countries - he threatened a “border tax” much like what he wants to slap on Mexico to pay for his anti-illegal immigrant wall south of the border. Imagine how this will hit FCA products like Jeep branded SUV's made in Italy. Either he knows not or cares little that to unilaterally apply a border tax is in violation of US treaty commitments to NAFTA [the North American Free trade agreement] and WTO [World Trade Organization] backfires on the US consumer. Such a border tax, escalates the price of goods imported into the USA, goods that the US can no longer make economically and efficiently at a reasonable price, ultimately punishing the American consumer with high prices.

Discrimination, the American way?

Consistent with this, Trump is also pushing for discrimination by his “But American” mantra. Again he cannot even distinguish which American company employs more people like in the case of Toyota USA, which is an American company as against FIAT-Chrysler which is essentially an Italian company registered in the Netherlands. Moreover, this kind of discrimination invites retaliatory measures from other countries who could enact anti-American import tariff walls.

Trump and the future of the US auto industry

Credit due to the Boss only

Trump is also the kind to grab credit for GM's disposal of its ailing Opel brand. After all, for over 10 years, GM could not just close Opel because it would entail costs that are way in excess of the drip feed funding that Opel needed in order to survive. But selling Opel has always been in the cards for the past 20 years and it is the interest of PSA Peugeot-Citroen that triggered the sale and has nothing to do with Trump's America First or reclaiming jobs for Americans as Opel does not sell cars in North America.

Dimwit, giveaway to China

Trump has a dim view of countries that have a trade deficit with the USA. What he cannot seem to understand is that China and the rest of the world sell more to the USA because the USA's own big companies, beholden to Wall Street, can no longer remain profitable by making products in the USA owing to its high cost of manufacturing and labor – Labor Union rules against multi-tasking, jobs and occupational safety insurance, environmental and ecological penalties/cost, litigation sensitive climate, etc. Hence their investment in more business friendly countries which also gives American companies access to bigger markets in the world. Conversely, if the American market retreats into itself, raising tariff walls, it has the effect of practically handing over the world market to China, Japan, Korea and India, which may perhaps be, for the better. There won't be a repeat of the world wide 1930s Great Depression because we have the other modern economies to take up the slack of a retarding America as America alone goes into depression.

We're not worthy

The positive policies coming from Trump's tweets and promises is the proposed massive cut in corporate income taxes, a move that any corporation would welcome. The fly in the ointment is that Trump is demanding that American multinationals remit back the money made abroad, not realizing that such profits are already at play in Wall Street. This is typical of Trump-the-supremo or the-CEO-is-always-right gospel truth approach, insisting that American business run his way, the way he runs Trump International, which made him rich. Never mind that NYC ex-mayor Bloomberg, a very thorough and professional executive, is five times richer than him.

Trump and the future of the US auto industry

Happy gas guzzling days are here again

Besides unravelling all the USA's world free trade commitments, Trump is also defanging and defunding the EPA to let loose more exploration of fossil fuels and even loosen up current CAFE [corporate average fuel economy] rules. This may just work for Detroit and the Foreign transplants building big car, big SUV and big pick-up trucks, the mainstays of the US market. Small car production will remain in other countries which will henceforth be subject to high border taxes if such small cars, never in real strong demand, are exported to the USA.

Shooting themselves in the foot

Trump is also reversing the safeguards for investment banking that prevents another financial crisis melt down, like in 2008-2009. He wants looser credit which runs counter to the stability pact that the Federal Reserve is committed to. This can work either way for the auto industry, but it all depends on aggregate demand. If it picks up in the USA, there will be shortages and high prices because of Trump's anti-foreign sourcing trade policies. It would be interesting to know if Trump's idol, Russia's Putin, is keen to watch America collapse by its own self-inflicted wounds. It may well be de ja vu as when the former Soviet Union's collapse on its own in the early nineties.

More own goals

In truth, any inward and new investment in domestic production by car companies, both US and global, is not because of Trump's policies. In fact there are still no enacted Trump polices and if there are any, there is still a need for it to be legislated by Congress. Which is where the hopes of globalized companies like most American companies rest. Americans who lost their jobs are the greatest supporters of Trump. According to the “anybody-but-Trump” campaign, the so-called racist white trash unemployed are now more vocal and visible. This group refuses to acknowledge that Globalization has improved the quality of jobs and brought down the prices of quality of life consumer goods all across the world. This is not what they want and refuse to see the bonuses of free trade. This group only see that they deserve jobs that were taken away from them, even at the cost of spiraling prices. To please these disgruntled voters, Trump's policies throw a massive monkey wrench to all the multi-national's global plans, the majority of which are American companies.

Divided we stand 

Thankfully, the USA is a democracy of check and balance. Whatever the whimsies of a demagogic executive, the legislature and judiciary are there to keep to the law. Despite Republican dominance of both legislative houses, Trump cannot count on their total subservience as congressmen and senators listen to the lobbyists of businesses who keep their State economies humming. Any Trump measure that will hurt their voting constituencies will be rejected as we have witnessed of late. Moreover, whenever the executive branch resorts to bullying above and beyond the law, the Federal justice system is quick to intervene.

The Apprentice is a greenhorn

As for “increasing” investment in US auto jobs as “great”, Trump's over abused qualifier for anything he says, does and tweet [never mind think if he actually knows how], these were programmed long before he even won in the Primaries. Expect that anything “great”, whatever that may be as defined by the USA's CEO, will always be to Trump's credit and anything that strikes him as not his way will always be blamed on immigrants, the press, Obamacare and “bad” people. Let's see how multinationals plan their future with such a one-man-show Apprentice running the White House.