Trump vs. General Motors

 

Donald Trump launched his latest salvo against General Motors with a threat to end the automaker’s federal subsidies if it follows through with plans to close several North American plants and lay off about 15,000 workers. However, as with Harley Davidson’s decision to move some production to Europe, at least part of GM’s decision can be traced to the president’s trade war.

 

On Tuesday, the president tweeted, “Very disappointed with General Motors and their CEO, Mary Barra, for closing plants in Ohio, Michigan and Maryland. Nothing being closed in Mexico & China. The U.S. saved General Motors, and this is the THANKS we get! We are now looking at cutting all @GM subsidies, including for electric cars. General Motors made a big China bet years ago when they built plants there (and in Mexico) – don’t think that bet is going to pay off. I am here to protect America’s Workers!”

 

White House economic advisor Larry Kudlow confirmed in a press conference that a possible move to cut GM’s federal subsidies was under consideration. Politico reports that Kudlow announced prior to the president’s tweet that the White House was “going to be looking at certain subsidies regarding electric cars and others, whether they should apply or not.”

 

Under current law, the federal government offers a $7,500 tax credit for new electric vehicles purchased in the US. This tax credit applies only the first 200,000 cars that a manufacturer produces. Since GM is close to reaching its limit, any change to existing law would have minimal effect on the company, but auto companies have been lobbying for an expansion of the law. CEO Mary Barra told Forbes that GM planned to double the resources devoted to electric and self-driving cars over the next two years. GM also reportedly gets about $943 million in other unspecified federal grants and tax credits.

 

Even though President Trump is talking tough over GM’s cuts, his policies are at least partly to blame for the lost jobs. Earlier this year, GM warned that Trump’s tariffs could force layoffs and cause increases in the price of cars. In September, GM announced that its 2018 material costs would increase by an estimated $1 billion due to tariffs as well as higher oil prices, inflation, and tighter supplies.

 

As with the higher cost of materials, there are a number of factors at play in the decision to close the plants and lay off workers. The plants being closed make sedans which are not selling well in the US as buyers choose more SUVs and trucks. Forbes also notes that the popularity of ridesharing services is driving a reduction in car ownership. A large supply of used cars has also contributed to a decline in new car sales.

 

The argument that GM’s cuts are purely due to poor sales of sedans misses an important point, however. The Wall Street Journal points out that China is GM’s largest market for small cars. After President Trump applied tariffs to Chinese imports, the Chinese government retaliated with a 40 percent tariff on imported American cars. If GM exports American-made cars to China they get hit with the double whammy of the US tariffs on imported steel and aluminum as well as the Chinese tariff on imported cars. That is a powerful incentive for the company to move small car production to China.

 

The entire episode is an example of the Law of Unintended Consequences. When President Trump launched his tariff policy to protect the American steel industry, it was entirely foreseeable that American companies that consume steel would suffer from higher steel prices. In the case of the auto industry, other problems are exacerbated by the trade war.

 

President Trump’s heavy-handed attempts to intimidate GM into keeping its plants open miss the mark. If the plants make products that are not competitive, then keeping them open will only weaken the rest of the company and possibly lead to further problems. If GM continues to build cars in the US that it cannot sell either here or abroad then it will be forced to either carry a large inventory or sell the cars at a loss. Alternatively, GM could pay workers to do nothing, but is a business‘s purpose to provide meaningless jobs or to sell products for a profit?

A better course would be to allow GM’s executives to take the steps to cut costs without incurring more public relations damage than necessary. The president should also get serious about eliminating trade barriers so American workers can build cars in this country and ship them around the world without incurring tariffs that make them too expensive for foreign consumers.

 

Unfortunately, President Trump’s trade policy has been similar to his immigration policy in that it focuses on erecting walls. Trump’s regulatory walls of tariffs and retaliatory measures by other countries are having the opposite effect from what was intended. Unless Trump reverses his trade policy, more American jobs will be shipped overseas to elude the tariffs that are being placed both on imported materials and exported American goods.

Democrats, Please Stop Using GM As An Example of ‘American Made’

In President Obama’s intro video, and in his remarks–actually anytime you hear Democrats self-congratulate about “saving the auto industry”–you hear about the GM bailout. You hear how Republicans wanted to let the company go under, and Democrats saved it.

Obama:

How could I not be — after all that we’ve achieved together? After the worst recession in 80 years, we fought our way back. We’ve seen deficits come down, 401(k)s recover, an auto industry set new records, unemployment reach eight-year lows, and our businesses create 15 million new jobs. (Applause.)

Here’s GM’s spin:

For the fourth consecutive year, Chevrolet, Buick, GMC and Cadillac vehicles are the leaders of the Made in America Automotive Index produced by American University’s Kogod School of Business.

The Buick Enclave, Chevrolet Traverse and GMC Acadia together tied for No. 1, while 17 other General Motors vehicles ranked in the Top 10.

Here’s the truth:

The Toyota Camry took the top spot this year, as 2014’s top vehicle — the Ford F-150 — fell below 75 percent in domestic-parts content with its 2015 model-year redesign. The Toyota Sienna, Honda Odyssey and Chevrolet Corvette return to the list alongside GM’s three-row crossovers: the Chevrolet Traverse, GMC Acadia and Buick Enclave. The Michigan-built SUVs were last on the AMI in 2013.

It’s not that automakers are slowing U.S. production. If anything, the opposite is true: Excluding heavy-duty trucks and commercial vehicles, automakers assemble 101 models in this country for the 2015 model year, from Chevrolet sedans to BMW SUVs. These cars combine for the vast majority of new-car sales, and U.S. production remains on the rise.

What is shrinking is the percent of overall domestic-parts content. Five years ago, 29 cars qualified for the American-Made Index. Today it’s fewer than 10. Consider the opposing paths of U.S. auto production versus so-called “homegrown” cars:

[Source: cars.com 2015 American Made Index]

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GM In China

GM was bailed out so it could outsource vehicle parts production overseas, and invest in Chinese-built cars.

For General Motors’ Buick brand, China is driving the best sales in its 112-year history, with America the outlier: Buick built and sold more than one million cars in China last year, compared with 223,000 here. So exporting the Envision, a Chinese award-winning sport utility vehicle, is a natural, considering America’s growing appetite for small crossovers, said Duncan Aldred, Buick’s vice president for sales.

That’s right. GM is building cars in China and exporting them to the United States.

Buick, desperate to fill the most glaring hole in its lineup, the compact crossover, will import the Envision.

And this month, Cadillac announced that it would export a plug-in hybrid version of its new CT6 flagship sedan from China, supplementing production of the standard version from its Detroit-Hamtramck plant.

The arrival of Chinese-made cars has surprised some people in the United States, particularly United Auto Workers leaders who objected to General Motors’ decision to begin selling the Buick Envision starting this July.

So, Democrats, all you did in bailing out GM was give their shareholders and creditors the shaft, to help hold on to some of the juiciest union jobs for a little while (and their massive pensions), without preserving the long-term job outlook. In other words: they picked winners and losers, and Toyota still outproduces GM on American soil, with less workers.

But with Trump, it can only get worse. In his “America First” plan, I expect that American companies will be penalized for moving production to China, while foreign companies will be rewarded for using foreign parts and less workers for assembly here in America.

As always, Adam Smith’s “invisible hand” is the best arbiter of who wins and loses in the economy. It doesn’t matter if the Democrats or Trumpocrats pick the winners. American consumers and workers will lose.