How a Trump tariff could sideswipe U.S. auto industry

The threat from President Donald Trump to tax Mexican-made cars

DETROIT — The threat from President Donald Trump to tax Mexican-made cars sold in the U.S. would throw the industry into disarray, analysts say, forcing some uncomfortable choices: Raise car prices or swallow the cost. Stop selling Mexican-made cars in the U.S. but risk losing customers. Move production to the U.S. but make less money.

“I don’t think the auto industry would turn up its feet and die, but it would be a terrible shock. It would create mayhem with their profitability,” said Marina Whitman, a business professor at the University of Michigan and a former vice-president at General Motors Co.

Trump hosted a breakfast meeting early Tuesday with the heads of General Motors, Ford Motor Co. and Fiat Chrysler Automobiles. Prior to the meeting, Trump tweeted that he wants “new plants to be built here for cars sold here.” He has warned of a “substantial border tax” on companies that move manufacturing out of the country and promised tax advantages to those that produce domestically.

Automakers expressed optimism after the meeting.

“I think as an industry we’re excited about working together with the president and his administration on tax policies, on regulation and on trade to really create a renaissance in American manufacturing,” Ford CEO Mark Fields said after the meeting.

But after closing 13 U.S. assembly plants during the recession to deal with excess capacity, Detroit automakers aren’t eager to open new ones, especially now that U.S. sales of new vehicles are slowing after reaching record levels.

The three automakers currently operate 27 assembly plants in the U.S. and seven in Mexico.

For more than two decades, Mexico has been an oasis for the auto industry, offering cheap labour and access to dozens of markets through free-trade deals. Whitman says Detroit automakers can’t build small cars profitably in the U.S., where a unionized auto worker can make $58 an hour in wages and benefits. By comparison, a Mexican auto assembly worker makes a little more than $8.

That helps to explain why automakers have announced $24 billion in Mexican investments over the last six years, according to the Center for Automotive Research, a Michigan think-tank . In all, $50.5 billion in vehicles and $51 billion in auto parts were shipped to the U.S. from Mexico in 2015, U.S. government data show.

Mexico’s auto sector, while still smaller than the U.S., is growing at a faster clip. Mexico’s vehicle production capacity is expected to rise 49 per cent to 5.5 million vehicles by 2023, according to LMC Automotive, a forecasting firm. U.S. capacity will grow 13 per cent to 14.2 million vehicles in the same period.

But Trump could change that. In frequent tweets targeting the auto industry, he has proposed both a 35-per cent tariff on Mexican-made imports and a “border tax,” which would tax companies’ imports. That’s forcing automakers to consider a number of options.

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