Waiting for the Trump card
By Louis Rumao
Newly-elected US President Donald Trump wants to bring manufacturing jobs back to the US. It remains to be seen if his methods would make goods a lot more expensive for American consumers, while adding some jobs. Industries, including tyre industry, wait to see what kind of card Trump holds to make America great again
The 2016 Presidential election was unique, to say the least. First, Donald Trump, a non-politician rolled over 16 other career politicians to secure Republican Party nomination. Then, during the campaign, he was derided by the media for his populist views on trade deficit, off-shoring jobs, deporting millions of illegal immigrants, and building a wall on the Southern border with Mexico. His surprising and totally unexpected win over Hillary Clinton seems to be, in large part, due to many Americans being upset over the question of losing jobs to cheap offshore labour as well as many citizens being fed-up with glib-talking, do-nothing career politicians and voted for a business man. Strange as it may sound, he received less popular votes than Clinton, but still came on top due to the Electoral College votes.
Candidate Trump picked on numerous manufacturers who manufacture goods overseas and importing them for American consumers and called for steep tariffs on foreign-made products.
“We’re going to get Apple to build their damn computers and things in this country instead of in other countries,” said Trump in a campaign speech. But making an iPhone in America, to take one example, could double the price, according to an analysis. Here’s the math: Foxconn, the Chinese company that assembles the Apple phones, pays its workers an average of $400 monthly. An American worker, earning only a minimum wage of $10 per hour, would get nearly four times that. So, add this extra employer outlay onto the $650 starting price of an iPhone and you’d see a whopping price hike, as much as two times higher. Interestingly, if Apple kept iPhone production in China, and President Trump slapped on the 35 per cent tariff he has threatened, the phone would cost a US purchaser less than $900!
Candidate Trump also railed against US car companies that shift operations to Mexico, naming Ford as one example, for its plan to build engines and transmissions south of the border, part of an auto industry trend to move or expand there. The wage differential between the US and Mexico is stark. In the US, Ford pays around $57 an hour to its factory workers. But in Mexico, an auto employee gets a mere $10. Typically, the cost of labour is 15 per cent of a vehicle in the US. But at the lower Mexican wage rate, the labour share shrinks to around 3 per cent, enhancing auto industry’s much-needed profitability, but also increasing Mexico’s autoworker employment by 40 per cent since 2008.
The cost differential applies across the board, from high-tech gadgets to low-cost apparel. Someone shopped for an ensemble – blue jeans, T-shirt and a pair of boots. The made-in-America set cost $421 vs. an imported one $99!
During the campaign, Trump said: “Sino-US trade deficit will reach USD505 billion this year.” He then proposed that the US should put 35 per cent tariffs on all goods coming to the US from China. This would certainly affect tyre imports into USA.
President Donald Trump did not waste any time – he met with the chief executives of the Big Three US automakers, on his second full-day in office, and “urged” them to build more cars in the country, pressing his pledge to bring jobs to America and discourage their importing of overseas-built vehicles. Trump, who has threatened to impose 35 per cent tariffs on imported vehicles, opened a White House meeting with General Motors Co CEO Mary Barra, Ford Motor Co CEO Mark Fields and Fiat Chrysler Automobiles NV CEO Sergio Marchionne saying he wants to see more auto plants in the United States. In return, the new president has vowed to cut regulations and taxes to make it more attractive for businesses to operate in the United States. All three CEO’s indicated after the meeting, saying that they see a positive environment for business growth.
Trump also rejected the proposed Trans Pacific Trade Agreement, and plans to re-negotiate the North American Free Trade Agreement with Mexico and Canada. So, it looks like he will try to make good on most, if not all, his campaign promises – certainly a change from traditional political campaigns and promises.
National business groups and associations, for the most part, like President Trump’s promises to revive the U.S. economy. Anne Forristall Luke, president and CEO of the Rubber Manufacturers Association, said the RMA would work with the Trump administration as it had with previous administrations.
“RMA will engage with the incoming administration’s transition team and work to educate incoming appointees, policymakers and new members of Congress about the issues important to U.S. tire manufacturers and the people and communities we serve,” Luke said.
Roy Littlefield, TIA executive vice president, said after the election that he expected some good things to happen for tyre dealers in a Trump administration, but added there are some question marks.
“With a Republican White House, Senate and House of Representatives, there are a lot of issues the administration could advance, including estate tax repeal, which is a big issue for us,” Littlefield said. “We’ll see a lot of positive things happening.”
But there are some things Trump may do that would not be beneficial to tyre dealers, such as new tariffs and value-added taxes on imported tyres, he said. Surface transportation funding also may be a problem under Trump if he backs funding methods harmful to TIA members, such as fuel taxes or vehicle-miles-driven taxes, he said.
“Trump said we must spend more on infrastructure,” Littlefield said. “We all agree with that, but how it is funded is another matter.”
A bit of history – in 2009, President Obama slapped a huge tariff on Chinese tyres in order to protect the US tyre industry, but tyre imports did not decline as other countries rushed to fill the void and tyre imports actually skyrocketed! The accepted estimate is that about 1,200 jobs were saved at a cost to US consumers of $1.1 billion. Unions and tyre workers were happy regardless of how things turned out, while consumers probably barely noticed that they were paying an extra dollar or two per tyre. But what if President Trump enacted a significant tariff across the board on every country? Economically, that would act like a sales tax on imported tyres. Prices would go up, which would allow American tyre manufacturers to increase production because the tariff advantage would be enough to make them competitive, and American workers in these sectors would almost certainly make gains, while all American consumers would pay higher prices.
There is one best-case scenario possible, though: President Trump threatens to impose tariffs and ends up getting some concessions from the exporting countries without ever enacting any tariffs. Let us hope, wait and see!