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January 2017

Trump, economic protectionism and the risks for the automotive sector

Dino Collazzo

Customs excise, international trade agreements review and the return to fossil fuels. Trump’s America is an unknown territory for the automobile industry.
 
Excise duties on imports and an overall review of the current International trade agreements. The newly elected President of the United States, Donald Trump, chooses the path towards “de-globalization” and bets on economic protectionism, with the automotive sector being the first possible victim. In fact, the 35% taxation to be supposedly imposed on vehicles imported from countries where the production was previously outsourced, top of the list is Mexico, is quite enough to disrupt the dreams of more than one car maker. In fact, the three Detroit giants (General Motors, Ford and Fiat Chrysler) as well as Japanese and German manufacturers have all outsourced part of their U.S. production facilities south of the Rio Grande. Nevertheless, only time will tell if and how the “Trumpeconomics” will affect business profit margins and, more in general, contemporary history, once events will unfold. At the root of this apparent isolation from the world – waiting for Trump to enter into the White House and lay down his cards in terms of economic policies – all we really have are declarations, tweets and appeals released by the American tycoon throughout his election campaign and even after the November election, aimed at supposedly safeguarding domestic production and those workers who stood compactly behind his electoral success.
 
Under the magnifying lens we find issues such as the possible application of a 35% tax on import goods that were once made in the United States. The negative effects will be particularly felt by car manufacturers such as the Volkswagen Group, BMW, Daimler, Toyota, Nissan as well as American giants such as GM, Ford and last but not least Fca. Huge industrial groups with a number of production facilities in Mexico. The risk, if this measure were to pass, is free falling margins for all of them. Meanwhile, Trump seems to have achieved some initial results. His excessive and cutting remarks have moved a few car manufacturers – Ford, FCA, Volvo and lately also Toyota – to announce or confirm, hefty investments in several US production facilities with the beginning of the new year. Few, in fact, believe that Trump, in the medium term, will be ready to introduce such duties, since a choice of this kind would have negative repercussions on the American industry as a whole. If you look at the automotive sector - but the same reasoning could also be extended to those sectors of the new economy that have their headquarters in the Silicon Valley, but their production chains in China – of the 79 billion dollars worth of goods exported by Mexican based companies into the United States during the first nine months of 2016, more than half was made up by components destined to US factories. Stringent barriers to free trade would have the result of reducing imports, with negative effects on US exports as well as the job market – with other states (China) choosing to impose similar barriers on US goods in their own territory starting a "trade war".
 
In support of the idea that Trump isn’t going to get serious on this issue, was the recent appointment of Mary Barra, GM’s CEO, in the expert committee that will support him in decision making strategies on matters pertaining to economic policies. A decision that goes hand in hand with the tycoon’s willingness, backed by the Alliance of Automobile Manufacturers, to review the recent crackdown imposed by the Obama administration on harmful emissions. It was never a secret, in fact, that Trump has always been skeptical on global warming issues and plans to stimulate a return to fossil fuels to revamp the US car industry. It seems quite unlikely, then, that the new White House tenant will be ready to wield the excise duty sword and stab to the heart a considerable number of US automotive enterprises, not to mention a few Italian industrial groups that are exposed – according to a Mediobanca study – by over 15% of the economic exposure in the US: Fca 80%, Cnh Industrial 55%, Ferrari 45% and Brembo 30%. What remains to be seen is what Trump intends to do in relation to some of his predecessor’s investments on new technologies like autonomous driving systems and the development of electric vehicle recharging infrastructures. These represent the recipes for a sustainable mobility which is driving the future of the automotive industry but that run the risk of being locked away in the attic by the new American administration.





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