Update (24 January, 2017): Trump has withdrawn the US from the Trans-Pacific Partnership, we've updated the "And China too?" section to reflect this.

donald-trump-gage-skidmore-las-vegas

On November 8, 2016, Donald Trump won a surprise victory against Hillary Clinton in the race to become the 45th president of the United States.

As with Britain’s decision to leave the European Union, this result has many wondering what will happen now that he has moved into 1600 Pennsylvania Avenue and gains access to the US' nuclear codes.

It also has minds in the automotive industry wondering what effect his presidency might have on the market.

Some background

Now that he has been officially sworn in as President, Trump will need to work with the House of Representatives and the Senate to pass legislation, although he has scope to act unilaterally in foreign affairs, and also interpret existing statutes via executive orders.

The Republican Party controls both chambers of Congress, although its majority in the Senate is slim.

With unified control, it's likely that more legislation will be enacted in the first two years of Trump’s reign than during the last six years of Barack Obama’s presidency, where the White House, House of Representatives and Senate were divided between the two major parties.

Despite that, Trump and Congressional Republicans disagree on a great many things, including some of his key promises.

2016-ram-factory-tour--1

 

Moving jobs back to America

During his polarising campaign, Trump promised to build a Mexico-funded wall along the border that divides the two nations. Just as provocatively, Trump vowed to block Muslim immigration to the country, deport all undocumented immigrants, and repeal the Affordable Care Act - commonly known as Obamacare.

These statements gained Trump a lot of column inches and cable news air time, but it was his pitch to “make America great again” and revive the market for blue collar labour that likely swung several traditionally Democratic “rust belt” states across the Midwest in his favour.

Without Pennsylvania, which he won by 44,292 votes, Michigan by 10,704, and Wisconsin by 22,748, we’d all be pondering the details of a Hillary Clinton administration.

Although he has yet to lay out a detailed proposal as to how he would significantly increase the number of manufacturing jobs, Trump spent a lot of his time wagging his finger and Twitter account at NAFTA, the North American Free Trade Agreement, which allows for tariff-free trade between the USA, Canada and Mexico.

Since NAFTA came into effect in 1994, not only has US investment in Mexico grown sixfold and total trade increased from US$82 billion ($110 billion) in 1994 to US$483 billion ($646 billion) in 2016, but Mexico has also seen a car factory boom.

Plants there not only allow manufacturers to tap into Mexico's market of 120 million people, but also benefit from the country’s low wages and costs, which makes it an excellent place to export to both the US and the rest of the world.

This trend was most recently highlighted on a global scale by Audi moving its global manufacturing hub for the Q5 SUV to a new factory in Mexico.

At various stages during and after the election campaign, Trump has promised to renegotiate or abandon NAFTA, which he labels as the “worst trade deal in history”. He has also threatened to slap a tariff or “border tax” of 35 per cent on all items coming from Mexico.

audi_q5_04

Can the US leave NAFTA?

It’s not entirely clear if Trump could remove the US from NAFTA without the help of Congress.

Some, like Barry Appleton, an international trade and investment lawyer, say that Article 2205 of the trade agreement allows for a head of state to pull their country out with six months notice.

Julian Ku a law professor at Hofstra University Law School, and John Yoo, a law professor at UC Berkeley, both argue that because NAFTA is a trade and tariff deal, and is backed up by a Congressional statute, the president would need their assent to leave the trade bloc, as it is beyond his constitutional powers to negotiate trade deals on his own.

And, given that congressional Republicans are staunchly pro free-trade, the necessary votes may be difficult to find.

If Trump is really serious about re-negotiating the trade deal, he will absolutely need Congressional approval to renegotiate the terms of the deal.

Commerce secretary nominee, Wilbur Smith, said during his confirmation hearing that everything's on the table and that NAFTA will be a "very, very early topic in this administration”.

What tariff regime would come into effect, if America withdraws, isn’t clear. It's possible that tariffs may be reset to those levied on "most favoured nations", which depending on the industry can still be very low.

haval-h6-lux_review_header

And China too?

Trump has shown a willingness to provoke China, which could lead to a trade war with the world’s most populous nation, and a purveyor of everything from Armani knock-offs to practically every item at your local two-dollar shop, not to mention, in all likelihood, the smartphone, tablet or PC that you’re reading this on.

While this might seem appealing at first, it’s crucial to remember how important the Chinese market is to all automakers. Growth there, and in other major developing nations, such as Brazil and India, can help to balance out stagnant automotive markets in developed parts of the world.

China is especially important to GM. As one of the early foreign movers into China’s automotive market, GM’s products, especially those sold under the Buick marque, have a cachet, desirability and market share that recall the company’s glory days back in its home market.

Indeed, according to its 2016 figures, the General sold more cars in China (3.87 million) than it did in the USA (3.04 million).

In addition to a potential trade war with China, Trump pledged not to ratify the TPP (Trans-Pacific Partnership), a free-trade zone that includes Australia and most Pacific Rim nations apart from China, and was designed to be a bulwark against China’s ever growing economic influence.

In addition to a range of other executive orders on his first weekday in office, the new President signed an order that would officially see the US abandon any efforts to ratify the necessary legislation needed join the TPP, leaving the trade bloc without its biggest economy and the 12 other participating nations in a lurch.

ford-ranger-xlt_review-header

Bullying companies to stay

The 45th president isn’t afraid to vent his feelings on Twitter, and he’s taken to the platform since his election to try and convince companies to either keep American jobs or ditch their plans for expanding in Mexico.

So far, he’s gone after BMW, Mercedes-Benz, Toyota, Ford, Hyundai and GM.

Some, like Ford, have sought not to provoke the incoming President.

In January, Ford confirmed that it wasn’t going to proceed with plans for a new plant in Mexico. In that announcement, the company also publicised further investment in its US facilities and acknowledged that Trump's election played a role in its decision making process.

On the flip-side, Ford also recently announced at the Detroit motor show that it will begin producing the Ranger in 2019 and Bronco from 2020 at its Michigan assembly plant, thereby confirming that it would continue with its plan to move production of the lower margin next-generation Focus south of the border.

BMW and Toyota, however, have fought back directly. Both companies have stated that their new Mexican factories will add capacity, and won’t replace production currently taking place in the States or elsewhere.

They also pointed out that they both have strong manufacturing presences in the US. For example, BMW’s plant in Spartanburg, South Carolina, exports a majority of its output and is the main production hub for much of the marque’s SUV range.

Even without his direct Twitter missives, it was notable during the 2017 Detroit motor show, car makers, both foreign and home grown, were all falling over themselves to highlight their contributions to the American economy and labour market, as well as the American-ness of their production.

In introducing the next-generation Camry, Toyota branded the sedan as “everybody’s all-American”. The company went on to boast that it has been "part of the cultural fabric of America for nearly 60 years" and noted its US operations include 10 factories and 136,000 employees.

Cause and effect

Whether because of hectoring, tariffs or unrelated business objectives, automakers may choose to invest in new US factories.

It should be kept in mind that any new factories or plant expansions take time and massive amounts of investment, and to deal with America's higher cost wage structure, any new US facilities will likely be highly automated and will require substantially fewer blue collar workers than factories of yore.

According to the US Census Bureau, the US exported US$212 billion worth of goods to Mexico, while Mexico sold US$271 billion worth of goods north of the border for a deficit of US$59 billion.

That might seem to back up Trump’s claim that Mexico is “killing” the US on trade, but many of these products come from US-based companies. And, as the Wilson Center points out, around 40 per cent of the content in Mexico’s exports to the US are actually components sourced from US suppliers.

And the US-Mexico trade imbalance pales into insignificance compared to the US’s trade deficit with China (US$319 billion).

Starting trade wars with Mexico and China may play well with Trump’s base, but economists argue if he's successful in slapping a 35 per cent “border tax” on Mexican-built goods, it could spark a round of tit-for-tat tariff increases.

This will cause prices for manufacturers and consumers to rise, which will drive down economic growth in both countries, and potentially cause people to lose their jobs.

And given the highly interconnected nature of the Mexican and US manufacturing sectors, any downturn in the auto market will cause pain in both countries.

volkswagen-tdi-badge

The environment and fuel economy

The new President is also a noted climate change sceptic, even going so far as to claim that it’s a hoax concocted by the Chinese government.

In the final days of the Obama administration, the Environmental Protection Agency (EPA) completed its review, over a year ahead of schedule, into the outgoing president’s corporate average fuel economy (CAFE) targets.

This effectively locks into place requirements for each automaker to hit an average fuel economy rating of between 50 and 52.6 mpg (4.7 and 4.5L/100km) by 2025.

Although this will be cheered by those concerned about the environment, Trump has made no secret about his disdain for environmental regulations and once vowed to “get rid of” the EPA.

His proposed head of the EPA is Scott Pruitt, who, during his stint as Oklahoma attorney general, sued the agency at least 13 times over a range of issues, including rules limiting power plant emissions of mercury, cyanide, sulphur dioxide and oxides of nitrogen (NOx).

If the President or Congress is able to shrink or defund the EPA, it will make enforcement of environmental policies, and detection of Dieselgate-style violations, even more difficult than it is today.

As such, more of the onus for environmental protection and enforcement may fall on the states, with large progressive administrations, such as the one in California, probably taking up a lot of the slack.

Even if, somehow, Trump is able to water down or eliminate the latest fuel economy targets, this may not have a huge impact on the vehicles we see here in Australia.

With most passenger and crossover models developed for sale across the globe, fuel economy and emissions standards in other parts of the world, primarily Europe, should see automakers continuing to engineer their vehicles with ever more fuel efficient drivetrains.

Any winding back of the US’ fuel economy targets will likely only benefit large pick-up trucks and their SUV offspring, as they are primarily sold in the US and Canada.

2017 Chevrolet Bolt EV

Electric vehicles

Although he hasn’t made mention of it so far, it’s possible that the new president may want to unwind some of the federal tax credits available to buyers of electric vehicles. Depending on the situation, EV buyers are eligible for up to US$7500 ($10,000) of federal tax relief on top of various state incentives.

At present, America's three most popular plug-in models, the Tesla Model S, Chevrolet Volt and Nissan Leaf, as well as the Tesla Model X and Chevrolet Bolt, are all produced in the USA.

With German and Japanese automakers now expanding their efforts in the plug-in hybrid and fully electric sector, any changes to the federal EV credit might occur at a very inopportune time.

Given the lack of noise on this front, and the fact that the EV credit is buried within the complex web that is the federal tax code, means that any changes are unlikely to happen soon.

chrysler-pacifica-hybrid-waymo-side

Autonomous cars

Donald Trump’s pick for Transportation Secretary, Elaine Chao, wife of Mitch McConnell, the Republican Party's leader in the Senate, might anger some of the President’s supporters as she’s from the “swamp” that he promised to drain.

In earlier times, her experience as Secretary of Labor in the George W. Bush administration, and Deputy Secretary of Transportation during part of George H. W. Bush’s term would make her seem like a safe and steady pair of hands to guide the Department of Transport through at least the next four years.

If confirmed, she'll play an important role in turning Trump’s infrastructure investment idea into both legislative and physical reality.

In addition to this she’ll also oversee the government’s efforts to regulate, or otherwise, the private sector’s research and development in the field of autonomous cars.

In 2016, the Department of Transport issued a set of national guidelines and framework legislation for the states with regards to self-driving vehicles.

The Republican administration may choose to amend the department’s work or scrap it altogether. Either way, it’s likely to play an important role in how companies test autonomous vehicles on public roads, and what type of regulatory environment self-driving cars will operate under when they become commercially available.

If the new administration opts for a light touch approach, it may prove to be difficult to harmonise the various rules and regulations currently in force across different states.

What impact will any of this have on Australia?

As with so much surrounding Trump, his candidacy and subsequent election, it’s difficult to make predictions as to what might happen next. This is partly due to his unpredictability, his often contradictory comments, the lack of policy details, and his unorthodox approach to both campaigning and the office of President.

Should the US leave NAFTA, this might have little direct impact on the Australian automotive market, because according to VFACTS, just 3227 cars sold in Australia during 2016 came from Mexico. With the country only the 22nd largest source of vehicles sold in Australia, it ranks just behind Turkey (3618) and well behind Argentina (7293).

If a full-blown trade war erupts between the USA and Mexico though, it might disrupt the global economy and impact Australia negatively.

More critically, if Trump starts a trade war with China, it would not only have a negative effect on the global economy, but also on our biggest client for natural resources, and a key component of our on-going prosperity.