Turmoil In The US Could Roil Global Auto Industry

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“If you don’t make your product in America, which is your prerogative, then very simply, you will have to pay a tariff,” the new American president told those who gathered in Davos, Switzerland last week according to The Guardian. During his inauguration speech, he made a “sacred pledge” to raise car manufacturing in the US to “a rate that nobody could have dreamt possible just a few years ago.” Making grand pronouncements is easy, of course. Turning them into reality is hard. But the repercussions from his remarks are already being felt in the auto industry both in America and around the world.

The US auto industry actually produces a lot of cars and components in Canada and Mexico, largely because the US has a free trade agreement with those countries that allows finished goods and the parts that go into them to flow freely back and forth across both borders. Most Americans would be shocked to learn that much or even most of the cars and trucks they think of as “American” aren’t made in America, a fact the new president seems blissfully unaware of. According to Google, General Motors produces a significant number of its vehicles in Mexico in factories in Ramos Arizpe, San Luis Potosí, and Silao. Chevrolet and GMC models such as the Blazer, Equinox, Silverado, Sierra, and Terrain are manufactured there. It also manufacturers the Silverado in Canada.

GM is hardly alone. Virtually every major car company has assembly plants in Canada or Mexico. The 25 percent tariff threatened by the current administration would bring the US auto industry to a halt in a hot minute or raise the prices Americans pay for their cars and trucks by thousands of dollars. The Guardian adds that Volkswagen, Volvo, and Stellantis are “most exposed” to potential new tariffs because of their reliance on US sales of cars and trucks that are manufactured in countries other than the United States. About half of the cars produced by German car companies are intended for the US market. Tariffs, if they come, will cause some painful adjustments for those companies.

They’re Just Cars

Living on Earth is an environmental news magazine produced by NPR. It recently interviewed green transportation journalist Jim Motavalli who is a regular contributor to Autoblog and Barron’s. That interview was the focus of an article by Inside Climate News. Asked for his take on the latest executive orders that dismantle much of the EV incentives put in place by the Biden administration, Motavalli said, “What I think is going to happen as a result of this is actually contrary to what Trump himself has said he wants. If he wants to be competitive with China, it seems like this is the wrong way to go about it.

“His approach is going to be putting tariffs on Chinese imported vehicles. But by taking away the income tax credit—which, under Biden’s IRA, very much encourages automakers to build cars in the United States and also to have their battery packs built in the United States—[Trump’s order] makes it less likely that automakers will consider the U.S. as a place to locate their battery plants and their car plants. That’s exactly the opposite of what he wants. So I don’t quite understand, unless you’re operating on some kind of visceral hatred of electric vehicles, why you would take that approach. I think part of it has to do with seeing them in a sort of political light, which to me is a mistake. They’re just cars. They’re not left or right, they’re not red or blue, and you can put whatever bumper sticker you want on them. They’ll represent you whatever your position is.”

Motavalli also was emphatic about the impact of tariffs on cars and trucks made in Mexico and Canada. “It will make cars more expensive. Right now, American automakers have plants in Mexico. They’ve put them there because they can produce cars at a cheaper rate, and they can also end up charging less for them. That’s why they moved to Mexico; to a lesser extent, it’s why they build in Canada too. In the long run, it will mean that automakers will want to locate in the United States if there’s no financial benefit to locating in Mexico. But for consumers, it’s definitely going to push up car prices, which are already very high. The average car today is something like $48,000 — that’s a lot of money. This is what people pay. The prices are already high. People are feeling the pinch of that, and adding those tariffs is going to make that worse.”

The US auto industry will probably enjoy the removal of limits on sales of highly profitable and much more polluting gasoline powered SUVs and pickup trucks, but that will probably mean slower US electric sales growth. “We will see less enthusiasm (for EVs) from consumers for sure,” Felipe Muñoz, an analyst at JATO, an automotive data company, told The Guardian. Buyers are already balking at the high price of electric cars compared to conventional cars. But the American auto industry has already made multi-billion dollar investments in EVs. Those investments are at risk of being squandered if the new anti-EV policies are made permanent. Rico Luman, an economist at ING, said, “We have seen already postponement of scaling programs.”

Jim Motavalli agrees. “I think it will make us less competitive. If you look at the Chinese and how they’re moving, they currently have over 50 percent EV adoption. Some other countries in Europe, Iceland and Norway are two examples, have over 90 percent EV penetration. So effectively they don’t have non-EV sales anymore. China is moving in that direction, and really fast, and … they can pretty much command what’s going to happen. The pace at which new EV companies are arising in China is just amazing to see.”

The reverberations have already begun. Electrive is reporting that Volkswagen has decided not to import the ID.7 sedan to the North American market, citing “the ongoing challenging EV climate.” That’s code for the political implications for the US auto industry are so chaotic and confusing right now, we are going to stay on the sidelines until there is some clarity about the future.

The situation with the nation of Colombia this past week offers clues to the thinking behind these tariff threats. That threat was used to bludgeon the government of Colombia (not Columbia, as the alleged president and Ivy League graduate stated) into withdrawing its denial of permission for US military planes to land unannounced in the country. It is likely those threats will be used to extract concessions from Mexico and Canada as well.

Almost 100 years ago, America enacted a series of punitive tariffs against foreign made goods as part of what was known at the Smoot–Hawley Act. According to Wikipedia, the retaliatory tariffs imposed by America’s trading partners were major factors in the reduction of American exports and imports by 67% during the Great Depression. Economists and economic historians are agreed that the passage of the Smoot–Hawley Tariff worsened the effects of the Great Depression.

What seems likely to happen is that the new tariff schemes proposed by the current administration will lead to a tit-for-tat battle that will damage not only the US auto industry, but other major sectors of the US economy as well, while China continues to build its industrial might and expand its economic power to more nations around the world. The likely result is that America will become isolated and irrelevant not only as an economic power, but politically as well. That seems to be a high price to pay for soothing the grossly inflated ego of one of the greatest narcissists of all time.