President Donald Trump met with business leaders on Monday and offered his plans to cut corporate taxes, impose a steep border tax on imports, and curtail regulations.
Businesses aren’t going to have any issues with the tax cuts and the regulatory rollback, but the border tax is something that everyone is going to furiously try to figure out.
This is especially true in the auto industry. Tax cuts will help Ford, General Motors, and Fiat Chrysler Automobiles to bolster their balance sheets, and a possible change to fuel-economy and emissions regulations will help them to build more profitable trucks and SUVs.
But a border tax is going to put them in the awkward position of potentially adding plants in the US that they don’t need, given the high level of sales currently in the market. There doesn’t seem to be any question that a border tax is coming, so while tax cuts could ultimately cause the whole thing to even out, automakers will need to decide if they simply want to pay whatever it is – or lobby to make sure that there are different levels of border taxation.
Obviously, imposing a border tax means adding to the federal bureaucracy – someone will have to figure out who owes what and how to pay – and that’s not necessarily going to sit well with many conservatives.
What isn’t going to sit well with Trump is the ultimate reluctance of automakers to go on a hiring spree in the US when a market downturn isn’t a possibility, it’s a certainty. GM just laid off an entire shift of workers at its Lordstown, Ohio factory – right in the heart of Trump country. Some 1,200 employees were let go because the car they build, the Cruze compact sedan, is experiencing declining sales in a market that’s setting new sales records.
This is important because even though the US economy is at full-employment now, with the unemployment rate under 5%, Trump’s supporters need manufacturing jobs to be created – jobs that don’t require a college degree and that can be located in the battleground states that the President won.
When companies sort out the math and the politics, they may decide that hiring is worth it to get the tax breaks and the regulatory rollbacks.
But those jobs will be unstable; and in the auto industry, they’ll be jobs that aren’t supported by demand. As soon as the market dips, they’ll be cut.
- Bryan Woolston/Reuters
Trump’s policies could keep auto sales elevated for another 12 to 18 months, but the US market will eventually fall back to a 15 million to 16 million annual sales pace. Gas prices could also rise again, leading to layoffs at SUV and pickup factories.
So if the bargain with Trump is some US hiring in return for tax cuts and regulatory breaks, the President will be setting himself up to deal with a lot of laid-off workers in 2018-2019 – and no leverage on taxes or regulations.
At that point, the border tax might be his only bargaining chip. So patience and cooperation could be the best way for US manufacturers to come out of this ahead. And in the end, the overarching trend of automation replacing workers and making manufacturing more efficient and productive will continue apace.
This is the tough math that Trump is facing. And we haven’t even gotten to the inflationary pressures the economy would face if hiring increases and wages go up in a full-employment scenario.