Who knows what is best for a business? Its owners or the government? Since the Trump administration announced plans to impose a 25 percent tariff on imports of autos and auto parts into the U.S., the stocks of GM, Ford, and Stellantis have all fallen. Tellingly, Stellantis (which includes Chrysler in a portfolio of carmakers, including Fiat, Peugeot, and others) was down by the least, perhaps because investors believe the tariffs would end up hurting the big, traditional American automakers the most. Tesla’s stock was up slightly. The cars Tesla sells in the U.S. are all made here, and while the company will pay a tariff on some imported components, the hit it is taking is far less than that for other manufacturers located here.
The problem for shareholders in America’s automakers and, for that matter, car buyers here in the U.S. is that the administration does not appear to be too concerned about any (supposedly) short-term pain that either may suffer. The government is attempting to restructure the U.S auto sector on a basis driven more by ideology — its determination to force more car production to be located within U.S. borders — than economic efficiency. This is an approach, to take some extreme but not entirely irrelevant examples, associated with some of the more disastrous economic experiments of the last century, from Soviet central planning to Argentine import substitution. Neither were engines of prosperity.
To be sure, some small measure of relief will be offered to carmakers in Canada and Mexico, our partners in the USMCA. This is the agreement negotiated by the first Trump administration, which replaced NAFTA. It underpins a somewhat integrated North American auto-manufacturing base, which will now be at least partly dissolved. Essentially cars that meet the threshold for North American content required by the USMCA will “only” be subject to the 25 percent tariff on non-U.S. content, with a twist. Non-U.S. content that is USMCA-compliant will, according to the White House, remain tariff-free until the U.S. has established “a process to apply tariffs to their non-U.S. content.”
Confusing, but not so confusing for there to be any doubt in Canada or Mexico that the U.S. has strayed a long way from what was agreed in the USMCA. There will be retaliation and counter-retaliation (as there will be between the U.S. and its other trading partners over car tariffs). That’s the way that trade wars work, and trade wars have a way of damaging all those who fight them.
Moreover, in breaking the terms of the USMCA, the administration has only reinforced growing doubts — particularly given the split growing within NATO — about the reliability of the U.S. as an ally or even a commercial counterparty. That will have economic, political, and geopolitical consequences, and they are highly unlikely to be positive.
We doubt that this latest turn of events is anything other than bad news for America’s auto sector, or those who work in or buy from it. The falling stock prices will make it more expensive for automakers — already battered by the financial demands arising out of the transition to electric vehicles — to raise the capital (or borrow the funds) they would need to invest in expanded U.S.-based production, even more so as the uncertainties and challenges associated with EVs have not gone away. And the more uncertainty there is, the less likely that investors or lenders will be prepared to finance capital-intensive projects. Investors know what they don’t know, including the impact of a trade war on carmakers’ international businesses, the future of EVs, the extent to which manufacturers can defray higher input costs with increased prices to the consumer, and, of course, the effect of politics.
The administration argues that the dislocation caused by this import-substitution process will be temporary, but how long is temporary? Voters are not famous for their patience or, as Joe Biden could explain, their fondness for higher prices, something that’s true even if this is a one-off adjustment. It is hard to see how these changes can mean anything other than more expensive cars, reduced demand for cars, or a bit of both. And more expensive new cars means more expensive used cars, which spills over into other areas such as car rental.
Midterms are coming, and the president has less than four years left to serve. U.S. carmakers and investors might decide that it is better to keep most of their capital on the sidelines for now. Foreign carmakers, many of which have troubles of their own at home, may be even more likely to feel this way. If this analysis is correct, there will be no surge in employment for car workers, but the reverse.
But let us assume for a moment that the reshaping of the U.S. auto sector takes place, and that the next stage of its life takes place behind tariff walls. How high those walls may rise is anyone’s guess. Relatively low tariffs may not be ideal, but they are not necessarily incompatible with a flourishing and innovative auto sector, but a shift toward a tariff-based industrial policy — and that is the direction in which we are headed — opens the door to the creation of a market driven by politics, cronyism, and the ascendancy of producer groups (the support of the UAW for this policy is a warning sign). And such a market leads to neither prosperity, innovation, nor well-paying jobs.
It’s a cliché to say that war is too important to be left to the generals. But automaking should, to the extent practicable, be left to the automakers.