Could President Donald Trump's initiative to increase automotive manufacturing in the U.S. actually kill more jobs than it creates?
By raising tariffs as high as 35% in a bid to force production to the U.S. from Mexico and Canada, the U.S. would increase costs, force new investment in plants and dampen sales by General Motors (GM) , Ford (F) and Fiat Chrysler Automobiles (FCA) .
The CEOs of the three automakers met with the president for breakfast on Tuesday. Afterwards, Trump said he wants to create a regulatory climate that "makes the process simpler for the auto industry." Automakers have complained about federal pollution, fuel efficiency, safety and other rules that are conflicting, costly and ineffective.
For now, vehicle manufacturing and sales are the beneficiaries of free trade within North America, meaning that materials, parts, components and vehicles cross borders without tariff. The arrangement allows automakers and their suppliers to purchase parts and labor as efficiently as possible, thereby keeping the cost of new vehicles as low as possible.
For example: A manufacturer of seats in the U.S. may buy materials in Mexico, assemble the seats in Michigan and then ship the seats to Canada, where they are installed in a pickup truck that ultimately is sold in Mexico. Though the process may look inefficient and expensive -- the materials cross borders four times before a consumer buys the truck -- it is far less costly than being forced (via a punitive tariff) to purchase materials, parts and components in the same country where the vehicle is built and sold.
In other words, high tariffs likely would mean that fewer vehicles would be built or sold in all three countries of North America because they would be too costly for some consumers. Less manufacturing would necessarily mean fewer jobs. Automakers and their suppliers would suffer a loss of revenue and profit as well.
The three Detroit-based automakers in 2016 sold 7.9 million, or about 45%, of the record 17.5 million new cars and trucks in the U.S.
The U.S. and Canada signed the basic automotive trade pact in 1965. In 1994, Mexico joined as part of the North American Free Trade Agreement to create a trilateral trading bloc.
Automotive manufacturing and employment have grown most quickly in Mexico lately, due to lower wage rates, as well as less onerous environmental and other regulations. A third key factor is the favorable trade deals Mexico has negotiated with other countries, especially in Europe.
In the run-up to the global financial crisis, which led to the bankruptcies of GM and Chrysler, the United Auto Workers union agreed to a second, lower tier of wages to relieve financial pressure. One of the provisions of the 2015 agreement between the union and the industry was phasing out the second, lower tier. Analysts warned that rising union labor rates in the U.S. would lead to more vehicle production migrating to Mexico.
Assuming President Trump is successful with his vaunted deal-making skills, he may find a way to soften UAW labor demands in return for more union jobs, drop more costly environmental rules and negotiate better bilateral trade agreements for U.S.-based vehicle manufacturing.
The payoff would be more U.S. automaking jobs: a win for the automakers, for the union and for the president.