The US and Mexico could reach a deal before June 10th
The president of Mexico is confident the two countries will reach a deal as reported in a recent Digital Journal article. However, that may be a bit optimistic. Some experts thinks that as Trump escalates his battle against foreign made cars he will drive the US closer to a recession.
The Mexican tariffs could hit the US auto industry hard
Although the tariffs start out at just 5 percent, they continually escalate to 25 percent by October. At the 25 percent level the tariffs could cost General Motors (GM) $6.3 billion, Fiat Chrysler (FCA) $4.8 billion and Ford $3.3 billion according to a Deutsche Bank estimate assuming the companies absorb the entire cost. However, this is unlikely, a certain amount will be passed on in higher prices to the consumer. By the end of Friday, the threat of the tariffs had helped wipe out $17 billion in market value on stock markets.
In 2018 Mexico exported $93 billion in vehicles and parts to the US. Many US auto makers assemble cars in Mexico that are then shipped to the US or build cars in the US using a mix of Mexican-made parts. Many foreign auto makers such as Audi, Toyota, Nissan and Mazda also assemble cars in Mexico to be exported to the US. Denso a top supplier is also located in Mexico.
US big three auto makers most at risk
More than 25 percent of GM’s Chevy and GMC brand US sales were of vehicles assembled in Mexico according to Cox automotive. Almost 40 per cent of Fiat Chrysler’s Ram truck were built in Mexico. While Ford is somewhat less exposed still about 10 percent of its sales come from vehicles imported from Mexico.
As profits in the auto industry are already thin many manufacturers my decide to pass much if not all of the cost of tariffs onto the consumer. This in turn could drive down their sales by driving up prices to the consumer.
David Schwietert CEO of Auto Alliance said: “[Tariffs] are a tax on our customers, which means they’re harmful to our nation’s economy and the millions of American jobs that depend on cross-border trade. Any barrier to the flow of commerce across the US-Mexico border will have a cascading effect — harming US consumers, threatening American jobs and investment, curtailing the economic progress that the administration is working to reignite, and potentially stalling efforts to ratify the agreement in Mexico, Canada, and the US Congress.”
If the illegal immigration is alleviated through effective actions taken by Mexico then the White House said the tariffs could be removed. Mexico’s actions would be determined in the sole discretion and judgment of the US.
It seems that part of what Trump is trying to do is force US auto manufacturers to move production back to the US. Trump said on Twitter on Friday: “In order not to pay Tariffs, if they start rising, companies will leave Mexico, which has taken 30% of our Auto Industry, and come back home to the USA,” he wrote on Twitter Friday.
Michelle Krebs, an executive analyst at Cox Automotive’s Autotrader said that what Trump wants is unlikely to happen as moving to a new plant in the US would cost billions of dollars and take years to do. She did not expect any auto manufacturer to change its plans as a result of Trump’s tariffs. The same also applies to supplier chains.
Some automakers may move production from the US
Doug Betts, who is head of JD Power’s global automotive division warned: “If you’re an automaker, and you think this is the way it’s going to be for the next 10 years, you say ‘hey, we can’t we can’t live with this, we can’t pay a 25 percent tariff, so we need to start moving them somewhere else where they won’t be so expensive,’” he says. “But that somewhere else might not necessarily be the United States. It could be India or Africa or who knows what.”
Trump just naively thinks that his policies will lead to bringing back production from the US but it could have the opposite effect in some cases. Trump said: “Should Mexico choose not to cooperate on reducing unlawful migration, the sustained imposition of Tariffs will produce a massive return of jobs back to American cities and towns. Remember, our great country has been the “piggy bank” from which everybody wants only to TAKE. The difference is that now we are firmly and forcefully standing up for America’s interests.”
Many of the biggest US auto makers are global corporations whereas Trump wants them to do all their manufacturing in the US. However, it is often cheaper to manufacture vehicles and parts in other countries and there have developed extensive supply chains that the companies depend upon. If Trump continues to threaten these huge US corporations he may find that the money he is counting on to fund his reelection campaign will be much less than he needs. He may even find that if he keeps up his pressure that companies will actually move auto production elsewhere to where there are no tariffs and labor is cheaper.
