Car­mak­ers face trade winds

In­dus­try sets up at Cobo amid global uncer­tainty

The Detroit News - - BUSINESS - BY KEITH LAING The Detroit News

Washington — As at least part of the auto in­dus­try ar­rives in Detroit for its last Jan­uary auto show, the busi­ness picture is mixed.

The econ­omy is said to be strong, and the au­tomak­ers are mak­ing money. But brew­ing trade wars with China and the Euro­pean Union are im­pact­ing the eq­uity mar­kets, and investors are look­ing for signs whether the Fed­eral Re­serve will con­tinue its sched­uled rate cuts in 2019, or slow them based on signs that global growth is slow­ing.

Car­mak­ers have chafed un­der steep tar­iffs on for­eign steel and alu­minum that were put in place by Pres­i­dent Don­ald Trump in March 2018, de­spite strong opposition from some fel­low Re­pub­li­cans in Congress and the U.S. auto in­dus­try. Fur­ther com­pli­cat­ing the eco­nomic picture for au­tomak­ers as they pre­pare to gather in Detroit, the Trump ad­min­is­tra­tion is study­ing the pos­si­bil­ity of im­pos­ing tar­iffs on vehicle im­ports.

For­eign-owned man­u­fac­tur­ers have said such a move would be dev­as­tat­ing to their busi­nesses, and do­mes­tic car­mak­ers have fret­ted about pos­si­ble re­tal­i­a­tion from coun­tries that are cru­cial to their global suc­cess.

Ad­di­tion­ally, Trump and lead­ers from Canada and Mex­ico have signed a new trade deal that would re­place the North Amer­i­can Free Trade Agree­ment that is likely to face a bat­tle for U.S. con­gres­sional rat­i­fi­ca­tion. The new deal known as the United States-Mex­ico-Canada Agree­ment — or USMCA — calls for in­creas­ing from 62.5 per­cent to 75 per­cent the per­cent­age of a car’s parts that have to come from one of the three coun­tries to qual­ify for duty-free treat­ment.

It also re­quires that 40-45 per­cent of an auto’s con­tent be made by work­ers earn­ing at least $16 per hour. Ve­hi­cles not meet­ing the re­quire­ments would be sub­ject to a 2.5 per­cent duty.

The Trump ad­min­is­tra­tion has also moved to freeze Obama-era gas-mileage rules after the 2020 model year, when au­tomak­ers will be re­quired to build fleets av­er­ag­ing nearly 39 miles per gal­lon fleetwide. The fed­eral gov­ern­ment also has in­di­cated it could move to re­voke a long­stand­ing waiver al­low­ing Cal­i­for­nia and other states to set their own stricter auto emis­sions stan­dards, touch­ing off a le­gal bat­tle that is likely to take years to set­tle.

U.S. Rep. Deb­bie Din­gell, D-Dear­born, said the uncer­tainty in mul­ti­ple areas is mak­ing hard for au­tomak­ers to make long-range plans as they head into the auto show sea­son when pro­to­types of fu­ture models are fre­quently rolled out. She pointed to Gen­eral Mo­tors Co.’s re­cent an­nounce­ment of aus­ter­ity plans that would idle four U.S. plants, cut 8,000 salaried em­ploy­ees and threaten the jobs of 3,300 hourly work­ers.

“We’ve wit­nessed the ef­fect of un­fair trade prac­tices,” she said. “GM is shut­ter­ing plants, leav­ing de­pend­ing on who

you’re talk­ing to, 14,000 or 16,000 un­em­ployed. The big­gest prob­lem with the pres­i­dent is the in­con­sis­tency of his trade poli­cies and not know­ing what’s go­ing to hap­pen, and I do think it’s start­ing to hurt the in­dus­try. When you’re talk­ing about tar­iffs, you have to have a strat­egy.”

Trump has touted his trade moves as an ef­fort to im­prove busi­ness con­di­tions for U.S. com­pa­nies, but in many cases he has gone fur­ther than au­tomak­ers were ex­pect­ing when he took of­fice two years on a prom­ise of be­ing a busi­ness-friendly pres­i­dent who would undo bur­den­some gov­ern­ment reg­u­la­tions that cor­po­ra­tions have chafed un­der for years.

Paul D. Ryan, vice pres­i­dent of trade and com­pet­i­tive­ness for the Washington-based As­so­ci­a­tion of Global Au­tomak­ers, which lob­bies for in­ter­na­tional au­tomak­ers, said Trump’s tar­iffs — both im­ple­mented and un­der con­sid­er­a­tion — are weigh­ing heav­ily on the en­tire auto in­dus­try.

“The en­vi­ron­ment all com­pa­nies are op­er­at­ing in con­tin­ues to be an un­cer­tain one,” he said. “Tar­iffs are hav­ing an im­pact. I’ve seen num­bers show­ing that Oc­to­ber of last year was the high­est tar­iff month in U.S. his­tory; $6.2 bil­lion was paid into the U.S. Trea­sury by all in­dus­tries.”

Ryan said car­mak­ers have thus far tried to avoid pass­ing ad­di­tional costs re­lated to higher prices for com­po­nent parts due to tar­iffs be­cause they know car buy­ers are also fac­ing higher in­ter­est rates.

“I think the com­pa­nies in a very com­pet­i­tive en­vi­ron­ment are do­ing their best to ab­sorb as much of the ex­tra costs as they can, but it’s un­clear how much longer that can last,” he said.

Ryan said Trump’s pro­posed tar­iffs on vehicle im­ports is “di­rectly aimed at us.”

“It will ef­fect ev­ery im­ported vehicle sold in the U.S., as well ev­ery vehicle built in the U.S,” he said. “Es­pe­cially if they put tar­iffs on in the way they’ve talked about, it will have a huge neg­a­tive im­pact on our in­dus­try.”

Kristin Dz­iczek, vice pres­i­dent of the Cen­ter for Au­to­mo­tive Re­search, said the uncer­tainty fac­ing au­tomak­ers now is likely to af­fect their de­ci­sions about prod­ucts that will be un­veiled years down the line. But she noted with union con­tracts com­ing up for all three Detroit man­u­fac­tur­ers, Trump’s trade poli­cies could have a big im­pact on plant and sourc­ing de­ci­sions that are likely to be flash points in la­bor ne­go­ti­a­tions.

“The prod­uct cy­cle is years in the mak­ing,” she said, not­ing the de­ci­sions about prod­ucts that will be rolled out next week were made be­fore Trump be­came pres­i­dent in 2017. “Stuff was de­cided about four or five years ago, be­fore we knew who was go­ing to be pres­i­dent. Where they’re go­ing to build it and where they are go­ing to source is what’s up in the air now.”

Char­lie Ch­es­brough, se­nior econ­o­mist and se­nior di­rec­tor of in­dus­try in­sights for Cox Au­to­mo­tive, said au­tomak­ers will likely have to ad­just to op­er­at­ing in a world with high tar­iffs as long as Trump is pres­i­dent.

“The ex­pec­ta­tion is these aren’t go­ing to go away any­time soon,” he said. “The pres­i­dent seems very com­mit­ted to these.”

Ch­es­brough said au­tomak­ers are look­ing for mostly for clar­ity from Trump about what the trade en­vi­ron­ment will look like go­ing for­ward.

“The thing the auto in­dus­try is watch­ing is whether there’s go­ing to be more tar­iffs,” he said. “At this point, they’ve kind of ab­sorbed within the in­dus­try the tar­iffs that have been out seven to eight months.”

Justin Sul­li­van / Getty Images

New cars sit at the port in Rich­mond, Calif. Uncer­tainty over mpg stan­dards, tar­iffs and trade agree­ments have made it dif­fi­cult for au­tomak­ers to plan.

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