Today our new unelected president was sworn in, rather boring event. I was more interested in his inauguration speech, and Trump went full nationalist. Hitler and Mussolini would have been proud, and both managed to leave their country’s industry, auto and otherwise, in ruins. In the worst tradition of those fascist dictators Trump promised “America First”, with “Hire American” and “Buy American” policies. I’ll put aside the “Hire American” threat for now, suffice to say with our ‘Merican economy at full employment, we’ll need some new americans to hire if Trump’s Tariffs actually work.

Trump has been ranting threats of 35% tariffs for months against Mexican, German, and now even Canadian built cars. Yet the automakers haven’t announced a single new American auto plant as a result. For good reason- An auto plant is a multi-billion dollar investment that will take at least a presidential term to build and bring online, and decades to pay off. And while you’d think the companies with the most plants and production capacity here would welcome Trump’s offer to disadvantage their more foreign made competitors, none have welcomed Trump’s tariffs.

Why?

Well for a start, there’s no such thing as an “American” car, or even truck. Ford is building pickups in Kansas City and Kentucky with engines made in Canada, Mexico, and the U.S.. Same with hundreds and even thousands of other parts. GM and FIAT-Chrysler build many of their pickups in Mexico with engines from the U.S.. I’m currently in the market for a new vehicle and choosing between the Ford Fusion built in Mexico, the Escape built in Michigan, and the Transit Connect built in Spain… And depending which model and drivetrain I choose, those parts make come from Great Britain, Spain, or the U.S.. The automakers decisions of what to build where are driven by economics- It costs a billion dollars or more to develop and tool up for a new model, and they need a volume of 200,000 units a year to make a popular priced vehicle profitably. Thus Ford builds models that sell in low volumes here like the Transit Connect in Spain where the added volume of the Euro market makes it profitable, while building high volume models like the big Transit and F150 in the U.S.. The Fiesta, probably Ford’s lowest margin car, is built in Mexico while the the slightly more profitable Focus is built in Michigan. Conversely, the pickups are largely a North American market only product, with the exception of small but profitable export markets like the mideast oil producing countries, while an older model Super Duty is produced in Brazil in response to tariffs there. GM, FIAT-Chrysler, Toyota etc. follow similar strategies.

So despite most of our auto plants here running at capacity, Trump turns loose his threatened 35% tariffs. BMW, Mercedes, and the other luxury brands privately laugh, using the tariffs as an excuse to further inflate prices and profits on cars that in some cases are already built here anyways. Ford, for example, is in a pickle though- Without a huge profit margin, they’ll have to increase prices on U.S. built vehicles to cover the tariffs on imported parts going into those vehicles. Sales on the U.S. built pickups, Transit, Focus, Taurus, and SUVs fall. Once prices rise to cover Trump’s 35% tariffs, not enough low volume models like the Transit Connect sell to be worth the bother, and a Mexican built Fiesta costs more than a bigger Focus. Ford drops the Fiesta from the U.S. lineup and maybe the Focus too, and imported powertrain options like the PowerStroke diesel are dropped after 35% tariffs make them unmarketable. The more profitable Bronco and Ranger that were going to keep autoworkers employed in Michigan are cancelled because they require a lot of imported parts that are too low volume to build here, and with Focus sales falling Ford is forced to close that very same Michigan plant he made such a fuss about “saving”. Same at GM, FIAT-Chrysler, Toyota, Honda, etc… prices rise as imported content is hit by Trump’s tariffs, sales drop, and plants are closed.

The process is repeated in most every industry like construction equipment, machinery, aircraft, etc. that the U.S. is still competitive in thanks to international parts sourcing. And that’s just the first order consequences of Trump’s tariffs… Next we’ll see retaliatory tariffs destroy family farming in a way we haven’t seen since the depression. But I’ll save that discussion for a future post…

 

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