On January 20, 2017, Donald J. Trump will take an oath of office and be sworn in as the 45th President of the United States of America.
Since election day in early November, when the Republican party and Trump won the electoral college vote over Democratic rival Hillary Clinton, a cloud of mystery and nervous suspense has covered the globe. Trump’s election platform was based largely on abolishing existing Obama administration programs, rather than implementing his own new strategies.
Now that the time has come for Trump to take office, the strategies he might have in mind are all a lot of people in the automotive industry can think about, and for good reason. The industry’s already beginning to feel the ‘Trump Effect.’ And it’ll almost certainly be felt in Canada soon, too.
The first move: Ford Motor Company
From the moment Trump announced his entry into the 2016 presidential race, he set out to redefine his country’s relationship with one of its neighbours: Mexico. Illegal immigration into the U.S. was talked of often, but Trump also singled out Ford Motor Company as an automaker moving production south of the border and taking away jobs from Americans.
For more than a year, Ford has felt the brunt of Trump’s attacks, with threats to impose large tariffs on Ford vehicles made in Mexico. A lot of that talk was inspired by Ford’s announcement it’d invest $2.5 billion in two Mexican plants, and make a further $1.6-billion investment in small car production there, too. What got lost in the fray was the fact no American plants would be closed and no jobs would be lost as a direct result of these investments.
Before 2016 ended, Ford announced it would not move production of the Lincoln MKC from Louisville to Cuautitlán, Mexico after all; Trump boasted he had dissuaded Ford from moving, but in reality Ford had only wanted to move MKC assembly to make more space on the factory line for the new Ford Escape. When Escape sales started falling short of projected goals, the move to Mexico was simply unnecessary.
Trump may have incorrectly taken credit for the Louisville plant situation, but there’s no denying he played a part in the cancellation of Ford’s $1.6-billion factory in Mexico. In early January, Ford CEO Mark Fields announced his company would scrap plans to build that factory, instead investing $700 million into a Flat Rock, Michigan plant for new electric, hybrid, and autonomous vehicles.
Fields’ rationale was two-fold: the plant’s construction was again made unnecessary by slowing small- and medium-sized car sales; but an endorsement of Trump’s forecasted domestic policy of lower taxes and loosened regulations factored in, too.
Now Trump has his sights on General Motors (GM) and its production of the Chevrolet Cruze in Mexico. Even though almost all of the Cruze production in Mexico is of cars destined for global markets, there’s no telling whether Trump might pursue GM further.
Ford’s assembly plant in Oakville, Ontario
But what about Canada?
Most of Trump’s election promises regarding the auto industry centred around the Detroit automakers and Mexico. The policies focused on American protectionism, and saw Trump often wield the threat of imported-goods tariffs. Canada hadn’t been mentioned until the start of the new year, when Trump spokesperson Sean Spicer fired the first shot northward.
“When a company that’s in the U.S. moves to a place, whether it’s Canada, or Mexico, or any other country seeking to put U.S. workers at a disadvantage, then Trump is going to do everything he can to deter that,” Spicer said during a conference call.
Spicer’s mention of Canada may seem casual, off-handed, but it’s there, regardless of whether it was planned or not.
Dr. Ian Lee, an associate professor at Carleton University’s Sprott School of Business, sees these actions as a warning sign to Canadians.
“In the last three days, the Trump administration has turned its attention to Canada, stating a border tax could be applied to Canada’s auto exports to the United States,” he explains.
If that’s the case, the automotive sector – largely integrated between the two nations since 1965, when the Canada-U.S. Automotive Products Agreement came into effect – could fall into chaos.
“We have significant protectionist measures on the books to protect dairy, telecom, and airline companies, for example, [so] the Trump administration could retaliate against auto exports due to its large volumes,” explains Lee.
While the U.S. would be hurt by this policy at first, Lee believes it would be Canada, which depends very much on business with the U.S., that would feel more of the pain of lost jobs and a downward economy.
The mood in Detroit
Many top automotive executives attending the North American International Auto Show (NAIAS) in Detroit early January were, as you’d expect, prodded for comment on the soon-to-be Trump administration—but it seemed no one wanted to tackle the subject.
While talking to some executives, the company line was to stay cautiously and diplomatically optimistic, in the hope things will stay largely status quo in the trade world.
Dieter Zetsche, chair of the board of management at Daimler AG and head of Mercedes-Benz Cars
“We’ve had a good relationship with the past U.S. administrations, no matter from what side [of the political spectrum],” said Dieter Zetsche, chair of the board of management at Daimler AG and head of Mercedes-Benz Cars. “Therefore, our assumption going forward will be the same, and beyond that we don’t know.”
Carlos Ghosn, Renault-Nissan Alliance CEO, echoed those comments, though he delivered them with a little more gumption. “As business people we adapt,” Ghosn said in Detroit. “This is not something that scares us, but something we will have to adapt to.”
Pricing to the tariff
At the forefront of Trump’s policy promises is a vow to end the North American Free Trade Agreement (NAFTA), which he characterizes as “the worst trade deal maybe ever signed.” NAFTA came to life in 1994, as an expansion of the Canada-U.S. Automotive Products Agreement mentioned earlier, rewritten to include Mexico and eliminate trade barriers, including tariffs, between the three nations.
At a time when the automotive world is relatively healthy and thriving after coming through the major recession tackled in the first few years of Obama’s administration, change is worrisome to most automakers. Change means moving production and restructuring plants, which will take time, costing more jobs in the interim.
The only known tariff threats Trump has made so far are of a 10- to 35-percent tax on vehicles and parts produced in Mexico, as well as a 45-percent charge on imports from China.
But that might be enough to do damage. According to industry analyst Dennis DesRosiers, nixing NAFTA or imposing a Mexican tariff could seriously hurt North American auto sales and the Canadian automotive sector as a whole. Even scarier is the fact the industry may be first on Trump’s policy targets list, says DesRosiers.
“Trump lost the national vote by a few million votes. He won the electoral college by taking Michigan, Ohio, Pennsylvania, and Wisconsin by a relatively small margin of votes, and guess which industry dominates Michigan and Ohio and, to a smaller degree, Wisconsin? The automotive sector,” DesRosiers explains. “Success in these states will be critical to his administration.”
If a 35-percent tariff was imposed on vehicles coming from Mexico, DesRosiers says, the reaction from automakers could go two ways: they could simply move production back to the U.S.; or they could “price to the tariff,” meaning they could jack up prices to cover the tax. The latter would hurt both consumers and automakers.
The hurdles in changing NAFTA
And the question remains: would these threats end with NAFTA? What about the South Korean-U.S. free trade agreement, changes to which could seriously hamper Kia and Hyundai? And the Trans-Pacific Partnership?
DesRosiers believes too many components from various countries are involved in the production of a typical vehicle to abolish NAFTA completely. Most likely, Trump will attempt to make modifications within NAFTA and utilize more bullying tactics throughout.
Dr. Lee agrees. “It is increasingly likely these acts will lead to a renegotiation of NAFTA that will reduce or eliminate protectionist measures exempted from NAFTA.”
Whether NAFTA gets modified or not, any revisions to trade barriers could have a negative impact on Canada. Canadian Prime Minister Justin Trudeau has reacted swiftly to Trump’s threats to NAFTA by showing a willingness to renegotiate.
Whether this means making minor changes, or eliminating Mexico from the pact, we’ll have to wait and see.