On December 4, 2016, President-elect Donald Trump tweeted:
“The U.S. is going to substantialy [sic] reduce taxes and regulations on businesses, but any business that leaves our country for another country, fires its employees, builds a new factory or plant in the other country, and then thinks it will sell its product back into the U.S. without retribution or consequence, is WRONG! There will be a tax on our soon to be strong border of 35% for these companies wanting to sell their product, cars, A.C. units etc., back across the border. This tax will make leaving financially difficult, but these companies are able to move between all 50 states, with no tax or tariff being charged. Please be forewarned prior to making a very expensive mistake! THE UNITED STATES IS OPEN FOR BUSINESS”
While the U.S. may be open for business, one thing is clear: under a Trump administration, it will not be business as usual.
While a Twitter post may seem like a far cry from legislative action, Trump’s senior policy director, Josh Mashburn, has stated that policy changes are forthcoming: “Mr. Trump will be focused on bringing jobs, including auto manufacturing, back to the U.S., and making sure that government policies are in the national interest.”
This is not necessarily music to the ears of automotive executives. During the Obama administration, OEMs and Tier 1 suppliers significantly increased their presence in Mexico.
Automotive executives will be interested to learn more about the vision of Wilbur Ross, who has been identified as Trump’s choice for Commerce Secretary. The immediate concern, given the recent rhetoric from Trump’s camp, is that OEMs and suppliers will be forced with a decision: continue to move automotive production from the U.S. to Mexico, or heed the warnings of President-elect Trump and stay put.
Earlier this year, Ford announced plans to invest $1.6 billion to expand production in Mexico. Similarly, GM announced plans to invest $5 billion there. Over the last six years Toyota Motor Corp., Volkswagen AG’s Audi unit, Kia Motors Corp. and BMW AG have all opened new factories in Mexico, according to the Center for Automotive Research in Ann Arbor, Michigan.
Large suppliers have also made substantial investments in Mexico over the past eight years. Between March 2014 and 2016, Denso added 1, 500 employees in Mexico. Magna International has 30 manufacturing facilities and almost 25, 000 employees in Mexico.
Given the stakes, automotive executives are keeping a close watch on Trump and his Twitter feed.
On the campaign trail, Trump argued that The North American Free Trade Agreement, or NAFTA, was “defective” and the “single worst trade deal ever approved in this country, ” because it has benefited Mexico at the expense of American workers.
When NAFTA was established 22 years ago, it brought about the elimination of tariffs on Mexico’s exports to the U.S. Thus, NAFTA incentivized manufacturers to move production facilities to Mexico, where labor is substantially cheaper. As a result, the United States has lost thousands of manufacturing jobs to Mexico. According to an economist at the Economic Policy Institute, NAFTA has cost the U.S. 682, 900 jobs.
While NAFTA resulted in a loss of manufacturing jobs, it came with a number of benefits. First, the implementation of NAFTA resulted in a significant increase in exports from the U.S. to Mexico and Canada. Second, the elimination of tariffs decreased the prices of goods. The ability to move intermediate products across borders provided a great advantage to manufacturers who are able to manufacture goods, including automobiles, for far less.
In a 2012 survey of leading economists, 95 percent supported the notion that on average, U.S. citizens benefited from NAFTA.
Regardless, the people have spoken, and President-elect Trump is likely to make good on his promise to renegotiate NAFTA or at least parts thereof. Trump’s promise to implement a 35 percent tariff on manufacturers who move jobs from the U.S. to Mexico would place a significant strain on automotive manufacturers that have become increasingly reliant on cheaper Mexican labor.
While Trump’s rhetoric may alarm some in the automotive industry, a review of relevant stock prices since Election Day paints a more encouraging picture. On November 8, 2016, Ford was trading at $11.50 per share. In the following month, Ford’s stock price increased 13 percent. General Motors, which was trading at nearly $31 per share on Election Day, increased 17 percent in the following month. The same is true with Honda Motor Co., Ltd., which was trading at $28.43 on Election Day, and is now up almost seven percent.
The market seems unconcerned with Trump’s promise to punish automakers who intend to move production to Mexico. Trump’s promise to decrease the corporate tax rate from 35 percent to 15 percent is surely a factor in the stock price growth.
The U.S. would not be alone if Trump is successful in imposing a tariff on imported automobiles. In 2011, China imposed additional duties on cars imported from the United States. True to form, Trump tweeted: “China just put a tariff on US cars and trucks — 22% —China is laughing at our inept leaders.”
It is important to note that President-elect Trump cannot implement the tariff alone. Article II, Section 2, Clause 2 of the United States Constitution includes the Treaty Clause, which empowers the President to negotiate treaties. However, those agreements must be confirmed by the Senate. Fortunately for President-elect Trump, he will have the benefit of working with a Republican Senate.
In March of 2016, Trump tweeted “Remember, I am the only presidential candidate who will bring jobs back to the U.S. and protect car industry!”
Now that Trump has won the White House, let’s all hope that he makes good on his promise.
Benjamin Katz is an attorney with Frost Brown Todd LLC in Nashville.
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