Tariffs won’t save the U.S. Auto Industry

It broke my heart to write that headline. It really did. We all love iconic vehicles such as Ford Mustang. Jeep Wrangler. Lincoln Continental, Camaro or Corvette. Maybe even a Cybertruck. 

Twenty-six years ago, U.S. vehicle production peaked at 13 million units. It has steadily declined since, and in 2023 U.S. production was just 10.6 million units. Neighbouring Mexico built nearly four million vehicles in 2023, most of these for the U.S. and Mexican market (and has been building Fords since 1925 and GM product since the late 1930’s). 

Photo credit: Photo by Brice Cooper on Unsplash 

The USA's automotive manufacturing challenges won't be fixed by tariffs, however because put simply too many of America's cars are made with the USA domestic market and its North Amercian neighbours in mind. Competitors’ models gain volume and share because they are built for global markets including Americans and therefore are made and sold globally. 

If you want a global best seller look at Toyota RAV4 or Toyota Corolla or Hyundai Tucson. A truly global product is one that has broad appeal in as many markets as possible and then is manufactured at 3 or 4 different plants around the world so that each model is made close to the major market that it is sold in, with global supply chains supporting this.  Elon Musk gets this. Model Y was 2023’s global best seller, and it is one of a very small number of vehicles that is global in a true sense, in that it is also successful in China (where it is made, along with plants in the U.S. and Germany). 

The Detroit three automakers—General Motors, Ford Motor and Stellantis’s U.S. arm—are settling into niches in China. U.S. brands collectively had a 5.7% market share in China in the first quarter of this year, according to the China Passenger Car Association, down from 8.5% three years ago.  

Almost all of the U.S.-branded vehicles sold in China are Chinese-made, taking advantage of the country’s supply chain. Imports from the U.S. are minuscule as a proportion of the total market. 

The U.S. makes vehicles primarily for the North American market. Japan makes cars across the world for many markets (these are global cars made globally). Japanese brands of course make cars in the U.S. (and Canada and Mexico). Korea makes global cars for global markets. European brands make cars for a mix of European and global markets. BMW and Mercedes-Benz manufacture their large SUVs in the USA for example and products like 3 series and C-Class are made in multiple countries. 

Interestingly the Trump created USMCA (United States-Mexico-Canada Agreement) encouraged Amercian companies to build vehicles in Canada and Mexico (rather than off-shoring further afield). Therefore, by penalising companies who manufacture in these two countries the current administration is penalising companies who followed his directives from his first term. Penalising cars made in Mexico only makes these cars more expensive in the U.S. domestic market, meaning they are less competitive than vehicles made further afield (or even less competitive than a Honda made in the USA).  

Regardless of which North American country builds ‘U.S.’ vehicles, what the U.S. big 3 really needs, is to start making products for global markets again. Ford & GM really needs strong a strong product portfolio that works well in almost all markets and in RHD and LHD. GM has left many RHD markets. Currently Ford’s most successful product is a full-size pickup truck they sold only in a handful of markets.  

Toyota by comparison sells a larger portfolio of global products such as RAV4 and Corolla in nearly every developed nation and has a suite of ‘emerging market’ products badged either Toyota or Daihatsu to sell to sell in less mature markets.  

Large countries such as China, Indonesia, India are dominated by a small number of brands, who typically have either localised product tailored to local demand (often shaped by incentives, tariffs, licence breaks or vehicle taxation).  

Putting tariffs on Ford, General Motors and Stellantis brands for vehicles that are made in Canada and Mexico will not strengthen these companies.  

Neither will reducing incentives for electric vehicles strengthen the position of these brands. American auto makers have to scale up their electric (and autonomous) manufacturing capabilities and scale to compete globally. Strong demand created by supporting incentives and legislation in their domestic market will support their investments in these areas.  

Dialling back emission standards and fuel efficiency standards in the U.S., may result in U.S. manufacturers making vehicles that are less competitive and less suited to foreign markets, given they have a domestic market focus.  

The Chinese auto industry is so powerful because there have been strong supply side and demand side incentives for the industry to build electric vehicles for nearly a decade. The Chinese state asked themselves, what did they need to achieve to become a global successful juggernaut. One of the answers was electrification, so that they weren’t creating in a legacy automotive space but were competing with tomorrow’s favoured powertrains.  

If Trump really want to Make America Great Again, the U.S. car industry is a great place to start. The U.S. should look add the carrot and stick incentives that were put in place for the Chinese market and Chinese manufacturers to develop world class vehicles to be sold across multiple markets. Chinese domination is not yet a given, but they are leaders in key areas. In trying to protect local manufacturing from Chinese brands, markets are reducing incentives to zero emissions vehicles as a roundabout way to thwart China’s vehicles. However, if they had joined up thinking they could whole heartedly join the race. Governments need to provide the incentives for research and design and create market conditions to help support their local automotive manufacturing brands to be bolder. Penalising vehicles made in Canada and Mexico won't strengthen American brands in the short, medium or long term, and may risk making them less successful on the global stage.  

Photo credit: Photo by Brice Cooper on Unsplash