GM vs. Tariff Man
The American auto industry is taking it on the chin from President Trump
"Tariff Man" is on a roll.
Last week, President Trump demanded that General Motors back off from its recently announced plans to idle several U.S. plants and layoff thousands of workers. Given the market pressures confronting the auto industry, this is like commanding GM to stop the tides. Then, this week, by dubbing himself "Tariff Man" on Twitter, he effectively killed the one thing that could have actually helped GM: the trade détente he had called just a few days earlier with China.
For a businessman, Trump doesn't seem to know much about business.
What's a CEO like GM's Mary Barra to do? Her decision to shrink 10-percent of the company's North American workforce is backed by solid reasons that a "tough negotiator" like Trump ought to appreciate, especially the fact that she is trying to inject a dose of reality before union contract negotiations next year. The unions will be less inclined to demand steep pay hikes, Cadillac perks, and the moon when so many jobs are already on the line. This isn't because of "corporate greed at its worst," as Democrats such as Ohio's Sherrod Brown, who are joining Trump's tirades against GM, are maintaining. It's because after a decade of post-recession bumper sales, GM is expecting a permanent — not merely cyclical — drop in auto demand, thanks to the app-driven increase in ride-sharing and other technological changes. In the U.S. alone, car sales are expected to drop from over 17 million annually this year to 15 million by 2020. And painful though GM's retrenchment is, Barra rightly reckons it's far less so when the economy is booming and at full employment and the company is still profitable.
What's more, Americans are not only buying fewer cars but switching from smaller to larger ones. So it makes sense that all the plants GM intends to mothball manufacture sedans such as the Buick LaCrosse, whose sales have dropped 45 percent over the last couple of years, and the Chevy Cruz, which has seen a 27 percent decline. At the same time, large vehicles have grown from 67 percent of its sales portfolio in 2015 to 80 percent now.
Nor is this because GM has ignored its small-car market share. Indeed, the green-shaming Obama administration made sure it didn't do so when it bailed it out from bankruptcy a decade ago. But dropping oil prices, rising fuel economy, and improving performance of larger vehicles has generated a titanic shift in consumer demand.
Everyone is affected. Earlier this year, Ford announced it was totally abandoning the sedan market. Even Asian manufacturers that have historically excelled at making affordable and quality small cars are shifting production to cross-overs, notes Patrick Anderson, CEO of Anderson Economic Group, a Michigan-based consulting company.
These solid economic concerns are why, even as politicos from both sides of the aisle were beating up on GM, its stock went up nearly 5 percent when it announced its cuts.
But Trump will help neither GM — nor auto-workers — if he piles on his own demands that undercut the manufacturer's profitability. He is right the company ought to repay the outstanding $11 billion balance of bailout money, if for no other reason than to shed the lasting stigma of Government Motors. But Trump's insistence that GM keep open plants manufacturing vehicles consumers don't want will make it far more likely that the company will be back rattling its tin cup for a third taxpayer bailout during the next economic downturn — or else threaten to layoff even more workers, just as it did last time.
The worst thing Trump can do for GM, however, is remain on his protectionist tear. His tariffs on foreign steel and aluminum have cost the auto industry $1 billion — more than eviscerating GM's $157 million savings this year so far from Trump's corporate tax cuts. As trade attorney and Cato Institute fellow Scott Lincicome tweeted, this could have paid for a year's salary for 24,000 assembly line workers who make an average of $41,000 annually.
Nor is his renegotiated NAFTA going to help domestic automakers. Its requirement that 75 percent of components in car imports come from North America — up from 62 percent — instead of cheaper suppliers in Asia will significantly raise production costs for domestic carmakers, as will the $16 minimum wage requirement for Mexican autoworkers. All of this will mean higher auto prices just when demand is plummeting. But Trump's NAFTA deal is evidently not protectionist enough for many Democrats who are threatening to torpedo it when it comes up for ratification in the next Congress. And if Trump, who likes to play high-stakes poker, tears up the existing NAFTA and the new Congress refuses to approve the new one, domestic automakers will be in for a long period of uncertainty whose worst impact will be felt by their workers.
Then there is Trump's trade war with China. His triumphant tweet from the G-20 summit that China had agreed to scrap its 40-percent tariff on U.S. cars — up from 15 percent after Trump slapped China with tariffs — turned out to be fake news. But this tariff isn't that big of a deal since imports from America constitute only 1 percent of China's car market; the vast majority of cars that GM and other automakers sell in China are manufactured locally to save on transportation and other costs. The bigger problem is that Trump has already imposed a 10-percent tariff on $200 billion of Chinese goods that he is threatening to raise to 25 percent if China does not negotiate a satisfactory deal within the next 90 days.
If the two sides can't work things out — by no means unlikely — Trump will surely invite Chinese retaliation. But even if he doesn't, his own tariffs are, ultimately, taxes not on Chinese imports but on American consumers, who'll have to cough up more for shoes and clothes at Wal-Mart. And if they have less in their pocket, they'll scale back their expenditures on big-ticket items like cars, threatening auto jobs. In fact, since consumers who shop for Chinese goods also happen to be the ones working in GM-type factories, tariffs are a double whammy for exactly the people Trump is pledging to protect.
GM is doing the right and responsible thing for a change. Mr. Tariff Man's job is to not get in its way but to start making trade peace with the world. No country has enriched its workers by beggaring its neighbors and partners.