What Ford’s China decision tells us about economics
As a candidate for the White House, Donald Trump blasted the Ford Motor Company for planning to shift production of its leading compact car, the Focus, to Mexico. He even went so far as to threaten a huge tariff on any and all U.S. cars formerly produced in this country that might be exported from Mexico back into the United States. After Trump’s election, Ford seemed to cave by announcing it would not be building the cars in Mexico after all.
So what are we to make of the surprising facts that Ford now plans to make the Focus in President Trump’s other trade nemesis — China — and that the Trump administration’s response is, essentially, “Whatever”? Ford’s move just “shows how flexible multinational companies are in terms of geography,” Commerce Secretary Wilbur Ross observed. You don’t say!
Lesson one: Economic reality is stubborn. Gas prices are plunging. Ergo, the American consumer can afford to indulge a preference for larger vehicles, to the detriment of smaller, fuel-efficient models such as the Focus, U.S. sales of which fell 31 percent between 2012 and 2016. Assembling these slow-selling vehicles in high-wage American factories is not profitable; even non-union Japanese and Korean carmakers are de-emphasizing small-car production in the United States, in favor of SUVs and crossovers. Trump’s coercion was bound to fail, and while it’s not ideal to see any production shift overseas, kudos to Ford for calling Trump’s dictatorial bluff — especially because the company plans not to lay off workers but to redeploy them producing pickups and SUVs in Michigan.
A second lesson, though, is that government subsidy can’t overcome fundamental market dynamics either. Ford was the recipient of a $5.9 billion low-interest loan from the Energy Department, authorized under a bipartisan program signed into law by President George W. Bush in 2007 but fund- ed by the Obama administration in 2009, the purpose of which was to help Ford produce the next generation of fuel-efficient vehicles in the United States.
“We have an historic opportunity to help ensure that the next generation of fuel-efficient cars and trucks are made in America,” President Barack Obama said. A declared purpose of the huge loan was to convert two truck factories to car production. The loan did, indeed, help Ford raise the fuel efficiency of its best-selling F-150 pickup (which it might have done anyway to meet stricter federal standards). But as Ford’s recent moves demonstrate, the dream of hot-selling gas sippers, made in the U.S.A., has apparently died, a victim of low gas prices and high U.S. production costs.
Is it too much to hope that the federal government will stop purporting to micromanage specific business-location decisions using either threats or bribes? The right approach is to enhance business conditions generally — especially through corporate tax reform — so that the United States remains competitive with all the other places in the world where capital may freely locate. Ross seemed to concede this, noting that after Ford’s move, German and Japanese automakers will be attracted to this country by Trump’s “reforms.”
So we’re wondering: What was the point of all that protectionist fuss?
Ford plans to move production of the Focus from its Wayne, Mich., facility to China instead of Mexico as originally planned.