Carmakers face trade winds as auto show underway

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." 

Dziczek has predicted the Trump administration will move ahead in 2019 with imposing tariffs on imported cars and parts and move to pull out of the North American Free Trade Agreement because Trump's proposed replacement faces opposition from Democrats in Congress. She also predicts sales will be lower in 2019 and there will be a high probability of strikes as the United Auto Workers union seeks to hammer out deals with Detroit's Big Three.

"The USMCA is not a done deal," she said. "Democrats have no political motivation to just merrily go along and rubber-stamp this thing. It could be leading to a NAFTA pull-out. It could be a 'USMCA-or-nothing' thing." 

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." 

klaing@detroitnews.com

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Twitter: @Keith_Laing