CEOs
usually avoid picking fights with incoming presidents, but Mark Fields
is fired up. Eight days after Donald Trump won the 2016 presidential
race, the Ford Motor Co. (F) CEO told reporters at a trade show that Trump’s trade plans, if enacted, “would have a huge impact on the economy.” And he didn’t mean a positive impact.
Fields
is feisty because Trump, while campaigning, singled out Ford for
criticism over its plans to open a new factory in Mexico. Remaking the
North American Free Trade Agreement is one of Trump’s top priorities
during his first 100 days in office, and that could directly upend
billions of dollars in investments Ford, GM and other automakers have
made in Mexico during the last decade. Trump has also threatened to
impose tariffs on Chinese imports, which could spur a damaging trade war
just as China has become an important source of profits for Ford, GM
and Fiat Chrysler.
Recent
analysis of Trump’s economic plan by S&P Global Market Intelligence
highlighted the American auto sector as the one industry most
threatened under the new president. “We see autos as the only industry
facing a high and negative impact from policies the new administration
may adopt,” S&P said. That’s a bit ironic, since the auto industry
still employs about 925,000 Americans in the kinds of decent-paying
blue-collar jobs Trump wants more of. That number is lower than during
the peak years of the early 2000s, but it has nonetheless recovered
nicely since the last recession ended in 2009. Millions of additional
Americans work in car dealerships, tire retailers and auto-repair shops
that will all suffer if the broader auto industry does.
Trump
has no beef with automakers, per se, but his trade ideas happen to
involve heavy manufacturers with a global footprint—which is exactly
what carmakers have become. Ford has 3 production facilities in Mexico
and another one planned, while GM (GM) has 4 and Chrysler (FCAU) has 2. Volkswagen and most Japanese automakers have plants in Mexico as well.
Mexico
imports about 2 million vehicles to the United States per year,
accounting for roughly 11% of the 17.5 million vehicles sold in the US
in 2015. The Center for Automotive Research forecasts that Mexican auto
production will increase by about 60% by 2022, with several automakers
planning to expand there. Production in the United States and Canada
should decline slightly during the same timeframe.
Most
automakers assemble smaller vehicles in Mexico, because such vehicles
have smaller profit margins than pickup trucks or SUVs and labor is a
larger portion of the total cost. Cheap labor, not surprisingly, is the
biggest advantage of manufacturing in Mexico, where total hourly
compensation including benefits averages just $8.24 per hour, according
to CAR. That’s 82% lower than the US average of $46.35 per hour.
Limiting Mexican imports
Trump
hasn’t spelled out how he wants to rearrange NAFTA, but the basic idea
is to encourage or compel more production in the United States, which
would mean less production in places like Mexico. But that would be
highly disruptive and would penalize American automakers more than their
foreign rivals. Trump could probably rewrite the rules in a way that
limits Mexican imports to the United States, for instance. But that
doesn’t mean automakers would simply move Mexican factories north of the
border. They might look for other low-cost countries instead, such as
South Korea, India or China. The Trump administration could pursue trade
restrictions on those countries as well, but that becomes a game of
free-trade whack-a-mole in which the government is trying to tell
multinational companies where to invest their money—hardly the lightly
regulated pro-growth environment Trump says he wants to create.
If
Trump tries to stop US automakers from producing in Mexico, that
doesn’t mean he can stop foreign automakers from operating there. So the
government would essentially be raising costs for American firms by
forcing them out of Mexico, but not for their global competitors. Trade
protections can equalize the cost of selling foreign-made cars in the
United States—but not in other markets. And Mexico actually has better
trade deals in place with Europe and Latin American countries than the
US does, which means it’s cheaper to export the same car to Italy or
Spain from Mexico than from the United States. That’s one reason Mexico
has wooed so many automakers. Moving production meant for export from
Mexico to the United States wouldn’t make any sense.
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