It’s impossible not to recognize Donald Trump’s campaign was heavy on rhetoric and light on actual policy details. Now his administration is tasked with setting how America handles trade, environmental and safety regulations for cars and much more. What does this mean for the global car industry? To quote people in the business itself: “We’re not sure yet.”
The automotive industry is heavily bound by the whims and fancies of the federal government, to a deeper extent than most other industries. The cars we buy and drive aren’t so much adherents to federal law and trade policy, but shaped and molded by it. Our small cars are cheap because they’re made in Mexico. We can have 707-horsepower supercharged V8s that still allow us to breathe because the Feds-on-high demanded it. We won’t be turned into red mush when we crash because our government won’t allow it.
All of that might change soon.
Under a “normal” presidency, this would be some sort of mundane task. If Hillary Clinton had won, this whole thing would be four words: “more of the same.” Boom, done. Clinton was, if nothing else, an ardent enforcer of the status quo. If Trump was a normal Republican, it would be a little longer, but not much. “Just look to either of the Bush presidencies, or the Reagan Administration,” one could say. “It’ll probably look like that.”
But Trump campaigned on not just traditional Republican trickle down economics, promising the wildly divergent feel-good (?) aspects of enormous tax cuts for the tremendously wealthy yet also huge infrastructure spending, but on an erratic platform that could best be described as political schizophrenia.
We’re going to ban Muslims. Or maybe we won’t. We’re going to build a wall on the Mexican border. Or maybe we won’t. We’re going to re-negotiate all of our trade deals. Or maybe we won’t. It’s all a little confusing, you see.
Confusion isn’t very good for a business like the global auto industry. Businesses often don’t care so much about specific policies, so much as knowing that they have specific policies to work with. But while we don’t quite know how those policies are going to shake out, we can still make some guesses.
Let The Trade Wars Begin
Despite a lot of things being up-in-the-air right now, we still have to take the things that President-elect Trump has said at face value. One of the planned policies is a massive 45 percent tariff on goods imported from China. China is immediately planning on responding with a massive tariff of its own, because that’s actually how the world works.
If that tariff system holds in place not just for China, but for other countries as well (Trump has mentioned bringing automotive manufacturing jobs back from Mexico through the use of heavy tariffs), massive sales declines are possible.
In 2014, the most recent year for which I was able to find full data, the United States exported more than two million cars, much of that to Canada and Mexico. Two million may actually not sound like much, but that number was actually on an incredibly massive upswing, increasing 138 percent over 2013.
Generally, when you reciprocal tariffs on exports are imposed, that leads to a crushing halt in exports. And that halt in exports will generally lead to a loss of jobs.
“But wait!” you say. “Surely there will be an increase in jobs as manufacturing of cars made in Mexico comes back to the United States?”
That would make sense, if you don’t think about it very hard. But having those cars built in countries like Mexico, where labor is cheaper, brings down the cost for consumers.
If production of small cars like the Ford Fiesta, for instance, is brought back to the United States, it’s anticipated that the move will add at least $5,000 to the manufacturer’s suggest retail price. And since no type of car is more susceptible to pricing than the most basic car, you’ll probably see a drop in sales there. Which means a loss of jobs.
Don’t worry, it gets worse.
Trade wars don’t just hurt industries like automotive manufacturing, they also hurt industries like trucking, since trucks haul a lot of the imports coming in from other countries and a lot of exports to major shipping centers. When industries like trucking are hurt, it also hurts the network of businesses, like rest stops and small-town greasy spoons, that have sprung up to support them.
And then there’s the possibility of a recession, as Noël Perry, an analyst with FTR Transportation Intelligence told Trucks.com:
“If he starts a trade war, we are going to have a recession, period,” Perry said.
But Whither The Demon, Regulations
One of the things that Trump has promised consistently is to “get rid of regulations.” It is, to be completely forthcoming, unclear as to the implications of that for the automotive industry.
The automotive industry isn’t just beholden to regulations, it’s reliant on them. It constantly needs to know what the regulatory environment is going to look like in order to create its products. You can’t design the exterior of a car, for example, if you don’t know what the safety requirements will be. You can’t design the engine if you don’t know what the emissions regulations will be. With cars designed on a five-year timescale (except in the case of Alfa Romeo), that makes them very difficult to plan.
And that’s not just me saying that. Multiple automotive industry insiders expressed doubts as to how it’s all supposed to work.
“We’re taking a wait and see approach,” one told me. “I simply don’t know, it’s such a good question. That’s why I’m at a loss to even know how to begin to answer you,” another who requested anonymity said when asked how the Trump administration will affect their company. “We don’t even have any kind of official corporate statement.”
A third corporate source, however, pointed not to a governmental action, but a market force as a guide post for how car companies plan on dealing with possibly erratic regulatory moves.
“Just look at fuel prices,” this person said. Product planners on constantly trying to predict fuel prices five years out, and can judge the market wrong. That tends to lead to things like a fuel-efficient hybrid going on sale just as soon as the price oil tanks, or huge SUVs going on sale as fuel prices skyrocket.
Sometimes that sort of thing is alright, and the company bets correctly and wins big. Sometimes the company bets wrongly, and survives.
Sometimes a company could make the Hummer H2, and Hummer dies.
In addition, we have no clue yet on where a Trump Administration will land on autonomous cars. Over the past year with Obama’s Transportation Secretary Anthony Foxx at the helm, the Department of Transportation has slowly but surely starting building the framework for regulations around cars that drive themselves—how they can be tested, what technology they must use, how they can talk to other vehicles, and so on.
Trump will be appointing a new secretary for that post soon. And during his campaign he didn’t broach the topic of autonomous vehicles that much. Via The Washington Post:
Donald Trump has focused even less on the issue. At a meeting with business leaders in Ohio last month, Trump, responding to a bullish comment on autonomous cars, got a few laughs when he asked “safer or catastrophic? I’ve seen some things,” according to an account in the Dayton Daily News.
From that same story, here’s why the office of president is so important when it comes to leadership on this topic, from Paul Brubaker, chairman of the Alliance for Transportation Innovation:
“All of these players have to be coordinated on the federal level,” Brubaker said. “If you designate an executive agency like DOT to take the lead on this, it’s really difficult to coordinate cross-agency. It’s damn near impossible. You’ve got to use the bully pulpit of executive leadership. This is only going to come out of the executive office of the president.”
If you know what’s happening ahead of time, your job gets easier. You can read the tea leaves, bet big, win big, and everyone goes home happy. Your company does well, you do well, your employees do well, more employees are hired, which pours more money into the economy, which grows it further, which helps people spend more on cars. It’s a beautiful, money-making positive feedback loop. Or the opposite happens.
But, let’s assume for a second that Donald Trump does what he has never done so far. He acts like a Republican.
He cuts regulations, and let’s the whole thing just sort of ride along as it will. Obviously, a slackening of regulations can be the underlying cause Earth-shattering economic failures, but let’s pretend for a second that these changes result in a more healthy economy.
But not every business wants a loosening of regulations. For an example, let’s go back to the trucking industry.
FTR analyst Perry went on to note that if the Trump administration loosens regulations, it may provide a boost to the economy – but only certain sectors of it. Trucks.com specifically pointed out the issue of speed limiters in trucks. When a truck is speed-limited, it tends to use less fuel, which saves companies money. But that’s not the end of it:
Major carriers and the ATA support limiting the speed of heavy-duty trucks. Many independent drivers and small trucking firms have objected to the regulation, saying it represents unwarranted interference in how they run their businesses and could create a safety hazard when trucks need to pass other trucks.
So, what few trucks remain could get to their destination efficiently. Or not at all. Because they crashed.
Of course, a lot of this assumes that a Trump administration, backed by a friendly legislature and judiciary, could even have that sort of control. Because the fact of the matter is, it won’t. A lot of our regulations don’t come from the federal government, they come from our state and local governments.
One of the biggest state-based influences is the California Air Resources Board, or CARB. CARB, created by then-governor Ronald Reagan in 1967, has the power to regulate automotive emissions, and it’s the only state allowed to do so since it was the only one created before the passage of the Clean Air Act.
Since it’s California, it’s actually much more influential than if it were, say, Rhode Island. California alone is the world’s sixth-largest economy, and in the first half of 2016 alone 1,045,440 new cars were sold in the state. For a sense of perspective, that’s 12 percent of all new cars sold in the United States. That’s nothing to sneeze at.
And it’s not just California, as 11 other states (Connecticut, Maine, Maryland, Massachusetts, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Vermont, and Washington) voluntarily follow CARB’s emissions regulations.
So designing just one car for California (despite the oddball California special that no one buys) quickly becomes impractical.
Although, if the economy tanks, no one will be buying a car at all.