Trump Now Threatening Automakers in Canada and Germany

By Paul A. Eisenstein

January 16, 2017

Already taking aim at Mexico, President-elect Donald Trump is now warning he might enact a 35 percent "border tax" on Canadian and German automobile imports.

"You can build cars for the United States, but for every car that comes to the USA, you will pay 35 percent tax," Trump told the German newspaper Bild, in an interview published Monday.

"In the long term, the United States would be shooting itself in the foot by imposing tariffs or other trade barriers," said Matthias Wissmann, president of the German automotive industry association VDA.

Trump specifically focused on BMW, noting that it is building a plant in Mexico that would produce vehicles for the U.S. market. But BMW would not be alone among German automakers. Audi last year opened a Mexican plant that is now the sole global source for the newly redesigned Q5 sport-utility vehicle. And Mercedes-Benz is preparing to set up a joint venture with Nissan's Infiniti brand in the Mexican city of Aguascalientes, where it will produce some of its new entry-luxury models.

Mexico has become one of the world's top five automotive manufacturing sites in recent years, in part due to low labor costs but also because it has negotiated more free trade agreements than any other country but Israel, auto industry experts note.

Threatening Tweets

The president-elect began threatening to impose automotive import taxes early in his campaign, initially focusing on Ford, which last April said it was going to move production of its small cars to a new factory south of the border. More recently, Trump tweeted threats aimed at General Motors and Toyota for also producing some of their vehicles in Mexico.

Earlier this month, Ford announced that it was scrapping plans for the $1.6 billion factory, triggering a congratulatory note from the incoming Commander-in-Chief.

Ironically, Ford also said it would continue with plans to move its small Focus model to Mexico, instead producing it at another, underutilized Mexican factory. Several senior Ford executives have stressed to NBC that they do not intend to give up on Mexican production.

GM Chairman CEO Mary Barra, recently named to Trump's economic advisory council, sent the same message last week during a media gathering at the North American International Auto Show.

Meanwhile, BMW CEO Peter Schwarzenbauer responded to Trump's threat by telling reporters the Bavarian automaker will not back down on plans to set up its $1 billion plant in Mexico, which is set to go into operation in 2019.

But Dieter Zetsche, the CEO of Mercedes-Benz parent Daimler AG left a little wiggle room in comments made during the Detroit Auto Show. Zetsche said he considered the automaker's Mexican plans "reasonable," and stressed it was too early to determine what the new Trump administration will actually do. But he also said that, "Politics set the framework for the economy and companies have to adjust to the framework, if needed."

BMW Is America's Biggest Car Exporter

German auto industry officials are privately expressing frustration with the threats from Trump, noting that they have quadrupled their U.S. automotive production since the beginning of the decade. And about half of the 850,000 vehicles the Germans produced here last year were exported. The BMW plant in Spartanburg, South Carolina, for example, is the sole source for the globally popular X5 model.

"It is surprising that Trump singles out the carmaker that exports more vehicles from the United States than any other manufacturer," said a report from Evercore ISI. BMW exports about 65 percent of the production from Spartanburg.

Japanese manufacturers have expressed similar frustration, noting they have invested tens of billions of dollars in the U.S., broadly expanding their American operations since the country emerged from recession. Honda, for example, produces more than 90 percent of the vehicles it sells in the States in U.S. plants, but it does import a small number of products from the U.S. and Mexico.

Automakers emphasize that operations throughout North America are tightly integrated and are woven into their broader, global manufacturing networks. Shifting production of all models to the U.S. would be difficult to impossible, especially limited-volume products like the Chevrolet Cruze hatchback produced in Mexico. The sedan version of the Cruz, by far the high-volume offering, comes from a factory in Ohio.

If new trade barriers go up, analyst Dave Cole, director-emeritus of the Center for Automotive Research, or CAR, in Ann Arbor, Michigan, warns it would result in "lower choice for consumers and higher prices." CAR last week issued a report noting that because the U.S. also ships cars and car parts to Mexico, the proposed restrictions would actually cost about 31,000 jobs.

What About Canada?

That report may soften support for rethinking the North American Free Trade Agreement by the United Auto Workers Union. Though the UAW supported Trump's opponent, Hillary Clinton, during the presidential election, it subsequently announced it would support efforts to change or abandon NAFTA. But the threat of losing, rather than gaining jobs, has not been lost on union officials in the U.S. or Canada.

"He's throwing grenades everywhere," Jerry Dias, the head of Unifor, the Canadian autoworkers union, said recently.

All three Detroit automakers operate plants in Canada. Fiat Chrysler Automobiles has the largest presence north of the border in terms of its overall production. That includes the recently updated plant in Windsor, Ontario producing the maker's critical Chrysler Pacifica minivan. Analysts say it would be difficult to impossible to cost-effectively move production of that people-mover back to the U.S.

Trump recently claimed credit for an announcement this month by FCA that it was going to invest over $1 billion into existing plants in Michigan and Illinois to build light trucks. But the two projects had long been on the books and simply replace slow-selling passenger car models with new pickups and SUVs.

Industry leaders have been looking for ways to get onto the president-elect's good side of late, even if they don't actually change production plans. Privately, though, they seethe at the possible impact border restrictions could have and many have questioned why the auto industry is being singled out when the garment industry - notably including various goods bearing the "Trump" label - have not been a target of the president's derision.