The Tariff Man, as President Donald Trump has called himself, set off another wave of selling on Wall Street, with the Dow tumbling below 25,000 to four-month lows on Friday.While the potential for increased prices on avocadoes and other produce is something that you might notice every day, the biggest losers if this latest round of Trump tariffs goes through may be automakers, as described in this article from Yahoo! Finance. And it mostly has to do not with the cars that are finished in Mexico, but ones that are assembled in America.
Trump's threat to impose escalating tariffs on Mexico, one of America's largest and most important trading partners, amplified fears about slowing economic growth.
The Dow declined 355 points, or 1.4%, capping its sixth straight losing week. That's the longest slump since June 2011. It's also the first time the Dow has closed below 25,000 since late January....
Trump said the United States will impose a 5% tariff on all Mexican imports starting on June 10 as a punishment for illegal immigrants crossing the Mexican border into the United States. The White House indicated the tariff would increase by increments of 5 percentage points each month until it reaches 25% in October.
Sixty-seven percent of U.S. imports from Mexico are intra-company, trade according to Deutsche Bank research. Torsten Slok, the chief economist and managing director at Deutsche Bank Securities, explains that means two-thirds of companies producing goods in Mexico are producing products for their own supply chain and other manufacturers.Oops. Seems like an important detail that Trump overlooked.
“U.S. trade with Mexico is all about cars. [Tariffs] would cripple the auto industry,” he said. “It would bring car production to a halt pretty quickly.”
Slok cites trade data that shows 35% of U.S. auto exports, from a value added standpoint, consist of parts manufactured in Mexico. That percentage reflects the value of parts produced in Mexico and Canada and included in cars assembled in the U.S. The number has grown every year since the mid-1990s when the North American Free Trade Agreement, NAFTA, was ratified.
“The whole industry really changed when NAFTA came into play,” says [former Kelly Blue Book senior director Rebecca] Lindland. “We are one region and the biggest challenge is that we are not flexible. Vehicles have 30,000 parts and if you are missing a couple of screws you can’t build that vehicle.”
That being said, the points in that article also makes the argument of “the prices of cars and trucks will now go up 5%” a bit tenuous, because many of those vehicles only will subject to tariffs on some of their components, not the whole car, assuming the vehicle is finished in the US.
Another reason why we might not see car prices rise by as much as people fear is because car sales are already struggling, so manufacturers and dealers can’t get away with raising prices. Take a look at this week’s inventory and trade in goods figures from the Census Bureau, which shows the auto industry struggling even worse than the stagnating manufacturing sector is as a whole.
Retail inventories, exports of goods
Exports of goods
April 2019 vs March 2019
Overall -4.2%
Auto sector -7.2%
April 2018 – April 2019
Overall -3.6%
Auto sector -6.7%
Imports of goods
April 2019 vs March 2019
Overall -2.7%
Auto sector -3.1%
April 2018 – April 2019
Overall -0.9%
Auto sector +2.3%
Retail inventories
April 2019 vs March 2019
Overall +0.5%
Auto sector +0.6%
April 2018 – April 2019
Overall +4.5%
Auto sector +8.0%
Note that 8% increase of auto inventories combined with lower exports and higher imports in the last 12 months. That means more cars and being stuck on the lots, and not being sold, so I have a hard time believing a dealer would have a lot of pricing power. What it likely means instead is that auto manufacturers and dealers are going to get hit with lower profits, which may lead to layoffs.
Remember, the idea behind tariffs is that it’s supposed to encourage auto companies to move their production to the US, and keep and add jobs here. The problem with that is 1. There isn’t enough demand for cars in the US as it is and 2. When has the Trump Administration or other Republicans asked for worker protections and higher wages for the jobs they are allegedly saving and making available for Americans?
From what I’ve seen so far, there’s also no nuance in how Drumpf’s tariffs will be carried out - anything coming in with have 5% added, even if the final assembly of the vehicle or other product is in the US. Worse, it’s not like the auto industry is hiring in America as it is. In fact, the “motor vehicles and parts” sector has lost jobs in 4 of the last 5 months, and there are 8,100 fewer jobs in the sector now than there were last October.
And yet inventories of vehicles keep going up in America while exports go down, which sure seems like a recipe to even more cutbacks to me. both in the US and Mexico. As usual, Trump didn’t think through this very much, he just wanted to score political points with deplora-trash by being seen as punishing Mexico for having brown people want to come to our country. But it seems more likely that the tariffs would cause economic hardships in Mexico that only encourage more people to come to America.
While I don’t like what NAFTA has done to work standards and wages for manufacturing jobs in America, the time to deal with that was 25 years ago, and sudden strikes of trade sanctions aren't the way to bring those jobs back. Now that Mexico has adjusted its economy toward that direction with jobs established, it would seem pretty dumb to randomly change terms of trade to discourage Mexicans from thinking things would be better in the US.
But maybe it's this simple.
This is a real headline. pic.twitter.com/ofjQElRCT9
— Pete Souza (@PeteSouza) May 31, 2019
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