There is much to crow about at this year’s Detroit auto show.
Sales hit another record in Canada and the United States. Pickup trucks, a North American speciality, were the big winner, with Ford’s F-Series the No. 1 bestseller.
But a number of protectionist tweets from U.S. president-elect Donald Trump have likely changed the mood in the industry — not just in Detroit, but in automakers’ head offices around the world.
And it is not just the giant manufacturers who are scratching their heads, trying to understand the implications of policy made by tweet. Trade ministers are also trying to imagine the effects of Trump’s cabinet appointments and how their governments might be forced to respond.
A move to bring auto manufacturing jobs home may indeed be good for the U.S. economy, at least in the short term.
Even while the economies of developing countries like China, India and Mexico have grown, the U.S. has remained a huge consumer of all the kinds of manufactured goods the world produces.
Traditional economic theory says all free trade is good and the freer, the better. The implication of Trump’s tweets is that there are limits to free market thinking. That has caused a backlash from some who might have been expected to support Trump’s right-of-centre ideas.
If Trump’s thinking is based on careful economic analysis, it might be that globalization has happened too fast. Perhaps it just doesn’t work to have one country acting as the main consumer nation while other countries are the producers.
The rules Trump hates
There are many who reject that argument, and they have evidence. U.S. unemployment has been falling and the economy recovering despite the existing trade rules that Trump hates so much.
A sudden change in those rules could be disruptive, and not just for foreign exporters threatened with an import tax.
Globalization has created a deeply integrated manufacturing network far beyond NAFTA. Floods in one country can stop production in another.
In the North American auto industry, for example, parts made in Windsor, Ont., are rushed, just in time, to plants in the U.S. where they are needed. The same happens in reverse with parts coming from Mexico and the United States for assembly into Canadian cars.
Of course no one knows exactly how Trump’s tweets will turn into policy. But unwinding such a complex system would have financial ramifications.
And that is the trouble with policy by tweets: 140 characters leave out a lot of detail.
Up and down the global supply chain, carmakers are asking themselves how and when those details will emerge.
Will companies manufacturing for the U.S. market be forced to abandon plants, or their plans for plants? Both could be expensive.
Are projects on hold? There is no point in doing expensive work on a plant without a future.
There is no question the reason most parts and assembly plants are located outside the United States is that they are less expensive.
By definition, bringing those jobs home will raise the cost of making cars. U.S. unemployment remains near historic lows, meaning new U.S. workers will not come cheap.
One solution is replacing Mexican workers with American robots. That would raise capital costs and lead to new U.S. investment. But if that was the cheapest option, it would have happened already.
Other things being equal, higher costs must lead to higher consumer prices or reduced shareholder profits.
Those are just some of the business considerations. The politics of protectionism opens another can of worms entirely.
Right now, trade rules are based on agreements similar to business contracts, except they are between governments. Careful renegotiation would take years with uncertain results.
Trump’s election rhetoric implies a more abrupt rejection of NAFTA. Breaking the rules over cars could crash the whole deal, leading to wider implications.
Under Trump the United States could grow into a trade pariah. Major U.S. exporters could face tit-for-tat trade sanctions and a subtle least-favoured-nation status as Mexicans decide they prefer homemade Volkswagens to Fords from Trump’s America.
Protectionists always think the rules benefit the other guy, but tariffs could also rise on U.S. exports.
Economic historians say a rising wave of tit-for-tat protectionism was a major contributor to the length and depth of the Great Depression.
The North American International Auto Show, as the annual Detroit extravaganza styles itself, is the epitome of American pizzazz, with bright lights, and glamorous presenters. It’s a time to set aside worries and admire the product.
But behind the glitz this year will be the spectre of Donald Trump, as the industry waits for policy by tweet to turn into a concrete strategy it can use to plan the future.
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