Trump will sow the seeds of a new boom/bust

US president-elect Donald Trump has used his Twitter account to bully Ford into pulling its plans for a $1.6bn (€1.5bn) factory in Mexico and invest $700m in Michigan instead. By threatening to put a big border tax on cars imported from Mexico, Trump has forced Ford to blink first.

Toyota and Honda, the third and fifth biggest players in the US car market, are holding out a little longer by saying they will decide on their future plans for Mexican investment, when they see Trump’s policies. Toyota is planning a new Mexican factory which will produce Corollas from 2019.

Trump can’t force their hand unless he is prepared to tear up the North American Free Trade Agreement (NAFTA) between the US, Canada and Mexico, which has been in place for over 20 years.

The US exported $55bn worth of cars around the world in 2015. Mexico exported $33bn and Canada exported $45bn worth. America has become the big market for cars made in Mexico and Canada.

By making its new Focus in Michigan, Ford has signed up to a higher cost base, and therefore a more expensive car to sell. Unless its competitors do the same, Ford won’t sell as many Focus cars in the future, even if it goes big on a ‘made in America’ marketing campaign.

The real play here is that Trump plans to subsidise higher cost manufacturing in the US, by cutting Corporation Tax. That might work, except somebody still has to pick up the tab.

He will end up using public money taken from elsewhere and higher exchequer borrowing to subsidise higher cost manufacturing at home, in order to make bold announcements about American jobs.

Americans will end up picking up the tab anyway. It might work in the short term, but it has all the ingredients of a classic boom/ bust a few years down the road.