President Trump, Please Tread Carefully

Donald J. Trump’s election as the 45th president stunned just about everybody, including me. His presidency almost certainly will have a profound impact on the U.S. auto industry. From NAFTA to CAFE to electric vehicles, the rules of the game are about to get tossed into the air.

While Trump promises to help the auto industry, I hope he’s wary of the law of unintended consequences. What looks like a helping hand could turn out to be a slap in the face.

As a candidate, Trump belittled NAFTA. It’s easy to see why so many voters roared with approval. NAFTA supercharged trade between the U.S. and Mexico, growing it sixfold in two decades. But far more goods are flowing north than south. Mexico now enjoys a $60 billion annual trade surplus with the U.S. No wonder so many Americans believe him when he says that NAFTA is a “job killer.”

President-Elect Trump says he’s going to slap a 35% tariff on goods coming in from Mexico. That definitely would bring Mexican imports to a screeching halt. But it also would cripple the North American automotive supply chain. Like it or not, Mexico is an important low-cost source of parts and components that make U.S. plants globally competitive. Chop off that cost advantage and U.S. exports suddenly will become non-competitive in global markets.

Of course, Trump’s rhetoric may be carefully calculated. The threat of a 35% tariff gives him a great bargaining chip going into any negotiations. And isn’t it interesting that Canada’s Prime Minister Justin Trudeau now says he’s ready to renegotiate NAFTA, too? Canada has a proportionally bigger trade deficit with Mexico than the U.S. does. I just hope both leaders realize any trade agreement with Mexico is critical to the health of the North American auto industry.

Automotive regulations also are in Trump’s crosshairs and this unquestionably is an area where automakers would welcome relief. There are nine federal agencies that regulate different aspects of the industry. None of them coordinate their activities, so we often have rules from one agency that work counter to those from another. For example, NHTSA writes stricter crash standards that require more structure that adds weight at the same time EPA writes stricter fuel-economy standards that require lighter weight.

None of these nine agencies coordinate the cost of their regulations, either. At best they provide estimates of what the cost of their own regulations will be. And then they keep piling them on. Regulatory coordination is one area where a Trump Admin. really could help the industry.

On the campaign trail Trump said he wants to ease fuel-economy standards. He also talked about getting rid of federal subsidies, which presumably means the $7,500 tax credit for electric vehicles would be jettisoned. That, too, would provide immediate relief to automakers. But there’s a caveat.

The current CAFE standards were written when gasoline cost $4 a gallon in the U.S. and everyone was sure it was going to $5. Today, gasoline costs closer to $2 a gallon in most of the country. Most car buyers don’t see the point in paying higher prices for more efficient cars when there’s no payback. So there’s a disconnect between regulatory mandates and what customers actually are buying.

Worse, California’s Zero Emission Vehicle mandates specify what percentage of car sales must be electrics or plug-ins. It’s one thing to offer consumers a choice; it’s another to force them to make a specific choice. Last time I looked it’s not working.

Besides, I’m not convinced EVs and plug-ins are as sustainable as they’re made out to be. ZEV regulations don’t take into account total life-cycle emissions. Making EV batteries is very energy intensive and they can be difficult to recycle. The same goes for the power electronics in EVs. What we need are technology-agnostic regulations that look at total emissions on a holistic, cradle-to-cradle basis for all vehicles. That would simplify regulations and put us on the path to true sustainability.

Yet watering down CAFE requirements and backpedaling on EVs will hurt the American auto industry. As surprising as this may sound, it’s all about manufacturing scale.

This is a global industry and trying to wall off the U.S. market from what’s going on in the rest of the world won’t work. As China and Europe push vigorously for higher efficiency and more EVs they are going to have an advantage over U.S. automakers and suppliers who can’t count on the giant U.S. market for manufacturing scale.

So how do you provide regulatory relief at the same time you don’t cripple the industry? My suggestion is to back off on the timelines, not the final standards. So instead of a 2025 CAFE goal of 54.5 mpg (4.3 L/100 km), make it a 2030 goal. We’ll still get to the same results, but that extra five years would be a huge benefit for automakers.

As president, Trump has the opportunity to make the American auto industry stronger. His policies could create more manufacturing jobs at home. And we still could get cars that are cleaner, more efficient and safer than what we have today.

But his policies also could backfire, resulting in a high-cost industry that’s out of whack with the global market. So the president-elect has to be very careful in how he offers a helping hand.