Trump says he is slapping a twenty five percent tariff on foreign-made cars in order to bring all aspects of auto manufacturing back to the United States. If only the world was that simple. Even for cars that are primarily manufactured or assembled here, they often import parts for overseas manufacturers. The bottom line is that the cost of ALL cars will go up and Trump said he doesn’t care if auto prices go up. Remember, this is the same guy who got elected by promising to bring the price of eggs down and now he is basically telling American consumers to just suck it up if they want or need to buy a car.
Automobile manufacturing plants are not built overnight! Building such plants and bringing them online will be measured in years. Secondly, huge, complex manufacturing plants are not built for free. They will cost companies tens of millions of dollars. Does anyone really believe the cost of those capital investments will not be rolled into the price of cars? Of course they will. There will certainly be a lot of construction jobs created during the building of the plants but given the way technology is going these days, the plants will rely heavily on robotics, and, in the end, there won’t be a huge number of jobs for the United Auto Workers. I am having a tough time understanding any benefit to the American consumer in this whole strategy (if you can even call it a strategy).
The auto industry began to ship some manufacturing overseas because it was too cost prohibitive for them not to do it. We have been down this road before. This whole tariff nonsense will make American automobiles expensive and because they are unnecessarily expensive, foreign customers will have many other more attractive options. American automobile manufacturers will be killed by foreign competition overseas. The only market that will be viable for American automobile manufacturers will be the American market and it is limited in size. Further, in efforts to reduce costs, the quality of America-only produced cars will likely start to decrease over time, particularly if they have no competition from overseas manufacturers like Japan, Korea, and Europe.
Professor of economics at Santa Clara University, Kris James Mitchener, and colleagues Kirsten Wandschneider and Kevin O’Rourke, researched the impacts of the trade wars started in the 1930’s by the tariffs imposed as a result of the Smoot-Hawley Act and found that American exports to those countries who retaliated against U.S. imposed tariffs decreased by 30 percent. The Smoot-Hawley Act did nothing to help the U.S. out of the Great Depression and, in fact, made it worse and last longer.
There are no winners in a trade war. Strategic use of tariffs can be a useful tool but the incoherent and Fox News sound bite strategy of imposing tariffs against even our best trading partners will likely follow the ‘law of unintended consequences’ and have far-reaching, deleterious impacts on the American consumers, the American economy and ultimately the world economy.
The biggest negative impact on American businesses will simply be that no other country, no matter how close an ally they have been in the past will trust that America will be a dependable trading partner going forward. This will likely be a permanent impact, and American businesses will have a very difficult time persuading international customers to buy American products.
Everyone should reflect back on how the automobile industry operated in America when it was dominated by the three major companies, Ford, Chrysler, and General Motors. Quality and reliability started to degrade even though costs continued to increase. Foreign manufacturers from Japan, Korea and Europe started selling cars in America that, in the long run, proved to be of higher quality and less expensive than cars that were solely built in America. It was the international competition that drove American companies to improve their manufacturing processes resulting in higher quality vehicles and to become more cost competitive.
There will potentially be one winner as a result of this international automobile trade war – Tesla! Manufacturers around the world are designing and building electric vehicles that are less expensive and compete directly with Tesla here in America. Could it be possible that Musk’s finger is on the scale of this tariff decision? As with everything Trump says and does, it is necessary to peel the onion to understand what the real motivation is. In the case of these tariffs, it will clearly not benefit American consumers and, frankly, I believe it has less to do with American jobs and more to do with what will benefit Elon Musk. So, once again we need to ask, “Who is really in charge?”
