If incoming President Donald Trump gets his way, a subcompact car is likely to cost more in a few years.
Trump has now called out Toyota (TM) for plans to move production of its Corolla economy car from plants in Mississippi and Ontario, Canada to a new factory it’s building in Mexico. The threat, of course, came in a tweet:
Toyota Motor said will build a new plant in Baja, Mexico, to build Corolla cars for U.S. NO WAY! Build plant in U.S. or pay big border tax.
— Donald J. Trump (@realDonaldTrump) January 5, 2017
This comes after Trump criticized Ford (F) for a similar plan to move production of the Focus subcompact from Michigan to Mexico, and General Motors (GM) for building a tiny number of Chevy Cruze hatchbacks in Mexico. (Most Cruze models are built in Ohio.)
Trump has clearly decided the auto industry is a fat target, since automakers have probably invested more in Mexico in recent years than any other type of company. But Trump’s attacks threaten to upend rational production plans the automakers have spent years putting into place, while also risking unintended consequences likely to harm consumers.
Higher prices for compact cars
If Trump actually managed to force automakers to move production from Mexico or other low-cost countries to the United States, there’s no way around the fact it would raise prices for car buyers. That, in turn, could reduce auto sales, which would reduce car-industry jobs. Or, it might give automakers even stronger incentives to replace workers with robots and other forms of technology, in order to keep a lid on prices and make sure they don’t lose out to other manufacturers with cost advantages.
Workers who feel harmed by the offshoring of US jobs might cheer Trump’s attacks on Big Auto, but in some important ways those attacks are misdirected. Japan-based Toyota, for instance, has invested more in US production than any other foreign automaker. It claims 10 US manufacturing facilities and 136,000 American employees. The Camry sedan is one of the most “American” cars on US roads, with an engine and transmission made in the United States and final assembly at factories in Kentucky and Indiana. The Sienna minivan is close behind. In a statement following Trump’s tweet, Toyota said its US employment will not decline when it moves Corolla production to the new factory in Guanajuato, Mexico (not in Baja, as Trump mistakenly claimed).
Relentless pressure on costs has led most automakers to Mexico, where they generally build compacts and subcompacts. Mexican workers earn about one-fifth what their American counterparts earn, and most automakers can’t make money on small cars made in the United States. The profit margin on small cars is often tiny and sometimes negative. Since labor is a bigger portion of costs on small, cheap cars than on larger, costlier ones, producing in Mexico lets automakers keep quality up while delivering the low prices consumers demand. That’s why most automakers are moving small-car production south of the border while refocusing US production more on expensive products with bigger product margins, as well as engineering, design and R&D.
Trump’s tactic of picking off one automaker at a time for criticism is bad economics. Moving production of any good from Mexico to the United States will raise its cost, and Trump is basically saying Toyota should absorb higher costs while other carmakers that still build in Mexico should enjoy a cost advantage. Ford, for instance, recently announced new investments in the United States, which Trump approved with a tweet–but it still plans to move production of the Focus to Mexico. The Focus and Corolla are direct competitors, and Trump seems to be picking the Focus as the marketplace winner by suggesting only the Corolla should be built by more expensive US labor.
A more rational approach would be for Trump to adopt new policies that apply to all automakers equally, which he might eventually do. After all, he’s not even president yet. Across-the-board rules would at least spread the pain more or less equally among all producers. But higher costs industrywide almost always get passed on to consumers, at least in part. This is why most economists hate tariffs and tariff-like measures: They raise costs to the end user while reducing disposable income and generally depressing the economy.
If you’re keeping score, Trump has now inherently blessed Ford’s production plans in Mexico. He’s backed off his criticism of GM for now, perhaps because he got his facts wrong on the Cruze. But there are other GM vehicles made in Mexico he could target. Since he has now gone after a foreign automaker, it’s reasonable to expect he will also ding Fiat Chrysler, Honda, Mazda, Nissan, and Volkswagen, which all make vehicles for sale in the United States. If all those factories end up on US soil, put aside some extra cash for your next down payment.
Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman