A 35% tariff on cars imported into the U.S. - that's one possible consequence of president Trump's pivot towards protectionism. Global car makers are getting nervous, as are Mexico and Canada, America's partners in NAFTA.
During the election campaign, candidate Trump promised to protect American jobs by imposing heavy tariffs on imports, and renegotiating the North American Free Trade Agreement with Mexico and Canada.
The idea is that free trade is a 'bad deal' for the American worker, and that protectionism will reinvigorate the U.S. economy – a notion contradicted by most economists.
In an interview last January with the German magazine Bild, president-elect Trump said about BMW: "You can build cars for the United States, but for every car that comes to the U.S.A., you will pay 35% tax. If you are building a factory in Mexico and plan to sell cars to the U.S.A., without a 35% tax, then you can forget that".
Now he is in office, it remains to be seen how much of his promises president Trump is willing and able to push through. But it is clear that major economic actors, including global automakers, are deeply concerned about America's repositioning towards protectionism.
As was evidenced at the Geneva Motor Show, where top executives of the auto industry gathered to vent their concerns about the looming shift in U.S. trade policy. Automotive News published an overview.
Volkswagen has been building cars in Mexico for half a century. Its plant in Puebla is VW's biggest outside Germany, and exports half its production to the U.S. Local Tiguan production will be ramped up to 130,000 units per year. “We have always based our activities on (the continuation) of NAFTA”, said VW CEO Matthias Mueller, who admitted being “worried” about U.S. protectionism, but confident that “these things will be discussed in a rational way”. VW's sister brand Audi opened a plant in Mexico last year for its Q5 crossover.
In 2016, BMW exported 70% of the X-class crossovers built at its plant in Spartanburg, South Carolina, which rolled out more than 411,000 vehicles last year. “The U.S. directly benefits from free trade, as we export (from the U.S.) in large volumes”, said Harald Krueger, CEO of BMW. “We support free trade. Protectionism would negatively affect parts of our value chain in the U.S.”
For now, BMW's plans to start production of its 3-series sedans in San Luis Potosi, Mexico from 2019 are going ahead. If Trump does enact trade tariffs, the company could shift production of German-made cars to its Spartanburg plant, Krueger said earlier.
Higher tariffs will force car makers to deal with the extra cost. Not every manufacturer will be able to shift production to the U.S. Likelier scenarios are that they will pass on part of the cost to the customer, or that they will readjust their trade to avoid the tariffs. That could mean less exports to the U.S. and – in the likely case that other countries raise tariffs on American goods in retaliation – exports from the U.S.
For his part, Volvo CEO Hakan Samuelsson pointed out that half the production of its South Carolina plant was destined for export, showing that free trade creates U.S. jobs rather than threatening them. The Swedish brand could be affected if Trump raises tariffs on goods imported from China, from where it exports locally-produced S60 and S90 sedans.
Lots of fear
Not everyone is worried, though. Daimler CEO Dieter Zetsche told reporters at Geneva that Trump had made positive noises about free trade: “We are relaxed about future developments”, he was quoted by Automotive News. Consequently, Daimler will continue to invest in the U.S., and in its NAFTA partner Mexico. The German manufacturer of Mercedes-Benz produces the GLE, GLE Coupe and GLS at Tuscaloosa in Alabama, and will start production next year in Aguascalientes in Mexico, at a new facility it shares with Renault-Nissan.
For his part, Renault-Nissan CEO Carlos Ghosn admitted that there was “a lot of fear” in the U.S. about trade prospects, but observed that “so far, nothing has happened” yet: “NAFTA is still there. It didn't change. It will probably change, but nobody knows. So we will be waiting for a decision before assessing”.
Much of the future for the car industry in the U.S. depends on whether Trump can keep his promise to renegotiate NAFTA into a deal more 'favourable' to the United States.
Trump's Commerce Secretary Wilbur Ross had said he wanted formal NAFTA renegotiations to start in early 2017 and be over in a year.
But Canada and Mexico, America's partners in the free trade zone, are anxious to keep the period of uncertainty as short as possible. They want talks to go ahead sooner rather than later. “People are sitting on their wallets and they’re not investing”, said David MacNaughton, Canada’s ambassador to Washington.
Mexico would like formal NAFTA renegotiations to start by early July at the latest, and be wrapped up by December, said Mexico's foreign minister Luis Videgaray. But he added: “Mexico will only accept changes to NAFTA if they benefit Mexico and Mexicans”.
But the Trump presidency is already hurting the Mexican economy: the threat of imposing tariffs on Mexican exports to the U.S. to pay for a border wall, and other measures to narrow America's trade gap with its southern neighbour – including the promised renegotiation of NAFTA – have depreciated the Mexican peso by 7% against the U.S. dollar.
Trump's repeated promises to impose heavy tariffs on cars imported from Mexico could prompt the country to walk away from NAFTA completely, said the country's economics minister Ildefonso Guajardo.
Canadian prime minister Justin Trudeau confirmed his opposition to U.S. import taxes on Canadian goods, saying such measures would hurt both economies, reported Automotive News Canada.
Image: White House
| 13/03/2017 | Frank Jacobs