Trump's tariff plan threatens wreckage for the auto industry, analysts say

U.S. President Donald Trump's meeting with Detroit's automakers on Tuesday contained a promise to turn the ignition switch and fire up American jobs. But analysts say that shiny new protectionist policy could be a lemon.

Trump's threat to wall off the import of Mexican-made cars with a 35 per cent tariff "would be a disaster" for the U.S. auto industry, says Marina Whitman, a former vice-president of General Motors. She warns of a less competitive automotive and supplier industry, a decline in market share compared with manufacturers in other countries, a "severely interrupted" supply chainand pricier cars.

The president's proposal "simply doesn't promote job growth," says Whitman, who teaches at the University of Michigan's Ross School of Business. "If Trump indeed pushes this protectionism if he sets up significant tariffs on imports from Mexico and also from Canada that would be quite devastating to the U.S. auto industry."

'Big league' proposal

Ahead of his Tuesday breakfast meeting, Trump claimed he was "bringing manufacturing back to the United States big league." In exchange for companies pledging to build in America, he spoke of incentives such as cutting regulations and lowering corporate taxes.

The proposals have made the automotive industry nervous. North America's industry has deeply integrated production and supply chains linking Canada, Mexico and the U.S.

Whitman notes that some 40 per cent of the parts that go into cars built in the U.S. come from Mexico. If those parts suddenlyhave major tariffs imposed on them, she foresees "plants here shutting down because of lack of parts," at least in the short term.

By the same token, cars assembled in Mexico use U.S.-made components, meaning American workers could be affected as well.

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Trump was unequivocal: "I want new plants to be built here for cars sold here!" he tweeted on Tuesday morning, ahead of the meeting with the heads of General Motors, Fordand Fiat Chrysler. (Fiat Chrysler is an Italian-controlled firm headquartered in England.)

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But coercing automakers to build all cars sold in the U.S. within the country won't just prove incredibly challenging, says economist Luis de la Calle, with the Mexico Institute at Wilson Center.

It will cost customers in the showroom, too.

"With less integration, consumers end up paying higher prices," de la Calle says. "If you close the border either for Mexico-U.S. or Canada-U.S. the entire auto sector in North America would stop. Because you cannot run a factory in Ohio without Canadian parts or Mexican parts, and you cannot run a plant in Ontario without U.S. or Mexican imports."

Missing at the table

What has so far prevented Trump from imposing tariffs on companies that have shifted production to Mexico is the North American Free Trade Agreement. The president had campaigned on a promise to renegotiate or rip up the trilateral deal, which prohibits the U.S. from slapping tariffs on goods made in Canada or Mexico and allows freer movement of labour across borders in some sectors. Reports Monday suggested he would sign an executive order to attempt to renegotiate the terms ofNAFTA on Monday, but that never came to pass. The president did tell reporters discussions about the future of the trade deal would begin "at the appropriate time."

De la Calle, who helped to negotiate NAFTA 25 years ago, believes Trump is meddling in the free-market principle"that companies should be free to invest where they think is best for shareholders."

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Meanwhile, the auto industry fears a combination of the Trump-proposed tariffs and a pullout from NAFTA could be a job killer. Last week, the Center for Automotive Research released a study that found 31,000 American jobs would be lost if the U.S. abandoned NAFTA.

The report also estimated 6,700 North American assembly jobs would be lost if a 35 per cent tariff on vehicles imported from Mexico were enacted.

Companies may be leery of confronting the president on trade issues, lest he attack them on Twitter, as he did this month when he blasted GM for making a Chevy Cruze model in Mexico before selling it in the U.S. GM responded that it makes most of its Cruze models stateside and sells only a "small number" of Mexican-made hatchbackmodels domestically.

Trump's sit-down on Tuesday with the Detroit CEOs was also notable for who wasn't there. Absent from the table were any representatives of Toyota, Honda, Nissan and Hyundai Asian automakers that employ tens of thousands of American workers in U.S. cities like Marysville, Ohio, and Canton, Miss.

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"My first curiosity is why he would limit such a meeting to just the Detroit Three?" said Ron Harbour, a senior partner in global automotive manufacturing with Oliver Wyman in Troy, Mich.

He noted that Toyota's Kentucky plant alone employs 8,000 Americans full time.

Some 98,500 American auto workers are employed by the 12 foreign-label companies represented by the trade group Global Automakers. The Asian automakers are included in that list. Altogether, the foreign companies issue $7.6 billion in paycheques a year, with their production accounting for about 40 per cent of all American-made vehicles, though the parts may have been sourced elsewhere.

"So where do you draw the line?" asks Harbour. "You've got so much content in even a U.S. or Canadian assembled vehicle that comes from Mexico."

Whether it was an oversight or strategy to only invite the Detroit Three CEOs most closely identified with "Buy American" ideals, Harbour says Trump ought to take a more comprehensive approach to promoting the U.S. auto industry.

"My belief is [Trump] is gaining knowledge of what's really happening in the North American industry," he said. "Once he understands that, my opinion and hope is he won't make quick decisions that might hurt the auto companies."