The world has held its breath for more than two months but the day is finally here. Donald Trump has arrived to the White House to sit in the most important political chair on the planet.
The new US president has used hate, fear and ignorance as sharp swords to make his way to where he stands now. After a series of tweets and public announcements, Trump’s plans have become evident and companies both in and outside the US are waiting to see whether he will deliver on his word. But exactly how much of what he said is true and how much of what he promised is possible?
A threatened 35-percent tariff on auto companies that planned plants south of the border was, of course, the biggest slap in the face of all the OEMs, both American and foreign. Trump menaced Ford first but he moved on to GM, Toyota and eventually BMW along with the other German automakers. The reasoning behind his “big border tax” is that he would pull the US out of NAFTA if Mexico and Canada did not agree to renegotiate the agreement. Unfortunately for him and fortunately for the auto industry, even if NAFTA were terminated the US remains a member of the World Trade Organization. This means that car export taxes are mandatorily capped at 2.5 percent for light vehicles and 25 percent for pick-up trucks. The new president could enforce heavier tariffs as an extraordinary measure against unfair trade but eventually companies could take the case to court and revert the process.
It is unlikely this will happen but regardless of the probability, the industry knows these changes would on ly hinder the US’ manufacturing competitiveness. Blocking trade in North America might force companies to stay in the US at first but production costs would inevitably increase. Average wages in manufacturing activities are 10 times higher in the US than in Mexico and while some jobs might be saved in the short term, the need for higher productivity at more competitive costs would force companies to invest in automation. In the end, manufacturing would be expensive and importing products would also directly impact consumers where it matters most: their wallets.
Another measure being discussed is a border adjustment tax presented by the House Republicans in the form of a new destination-based cash-flow tax (DBCFT). This provision looks to tax imports and eliminate tariffs for exports to support US manufacturing activities while reducing corporate income taxes from 35 to 20-25 percent.
The DBCFT seems right up Trump’s alley. But he had already naysaid it as “too complicated.” Trump expanded: “Anytime I hear border adjustment, I don’t love it. Because usually it means we’re going to get adjusted into a bad deal. That’s what happens,” he explained in an interview with the Wall Street Journal on Jan. 13, 2017. Instead, he is lobbying for corporate taxes to be reduced to 15 percent and financing to incentivize exports. This would actually be a lucky break for the industry considering how intricately connected manufacturing operations have become. Auto parts and sub-assemblies travel back and forth between Mexico and the US several times before the car is actually finished and taxing products each time they return to the US would make them more expensive.
And then there is sustainability. President Trump has not been shy in demonstrating his contempt and disbelief regarding climate change. Former President Barack Obama’s administration had worked hard to push the Environmental Protection Agency’s (EPA) plans to implement more stringent regulations for automakers. The EPA has stating that “automakers are well positioned to meet the standards through model year 2025 at lower costs than predicted.” This, however, has not sat well with OEMs that see these measures as far too demanding.
In terms of viability, Trump’s idea of scrapping the EPA’s plan might be the one that has the most traction since the industry is backing him up.
The president’s favoritism toward traditional energy sources could indirectly present an unfortunate scenario for the Mexican industry. With Trump pushing for more oil production, prices could drop even further, boosting the large vehicle and truck market. Considering that Mexico’s production is mostly based on compact vehicles and small SUVs, this could hit the country’s production goals for a second year.
The good news for those betting against him is that according to several bookies, Donald Trump’s odds to complete his first term are not that favorable. Irish online platform Paddy Power has 4-1 odds that Trump will be impeached within his first six months and 7-4 that he will not complete his term.