The Complexity of Car Manufacturing & Trump vs. Reagan on Global Trade

Car manufacturing is complex, cyclical and competitive. Trump's tariff policy introduces an extra layer of "change" and "chaos" to car manufacturing. It not only nullifies existing trade agreements signed by the current president (and completely reverses trade policy advocated by President Ronald Reagan) but also mandates that all companies build plants in the US or face high tariffs. President Ronald Reagan had the foresight and courage to establish trade policies that helped lay the groundwork for making America "Great Again," (American Exceptionalism.) However, in the first 100 days of President Trump's second term, his tariff policies marked the end of American Exceptionalism.

The idea that imposing high tariffs on imports will lead to a significant on-shoring of car manufacturing investment to the US overlooks the complexities of the industry. Car manufacturing requires substantial investments, and companies must have trust and confidence in the economies where they invest. Trump's tariff policy is already encountering legal challenges domestically, and there is no guarantee it will continue beyond his current four-year term.

Car manufacturing involves multiple stages, beginning with plant location, engineering and design, as well as the sourcing of materials and parts. The manufacturing process itself includes several stages such as stamping, welding, painting, and the final assembly.

Today, it may take as long as 24 months for every phase of car manufacturing to be fully up and running. Thus, even if companies chose to start tomorrow, they wouldn't be completely operational until 2027. With Trump's term concluding in 2028, many will question whether the significant investment is justified.

Companies must also consider that moving production to the US results in a higher average cost per vehicle, decreased sales volume, and tighter profit margins. With a reduced return on a substantial investment, companies will question whether it is worthwhile. Also, capital investment flows to where there is trust and stability. However, Trump's tariff policy is "chaotic and unpredictable", which should also negatively impact new investment.

Before a foreign manufacturer, or even a US company, opts to initiate or expand production in the US, it must first ensure its supply chain is prepared to adapt and invest accordingly. There is no guarantee that its dependable and trusted supply chain will follow, particularly considering the significant costs and the uncertainty surrounding Trump's tariff policy. This might also result in increased costs per vehicle, prompting companies to consider fully withdrawing from the US market.

An often overlooked aspect of Trump's tariff policy is that it involves imposing tariffs of different scales on exports from foreign countries to the US. How can a foreign country instruct or compel its own companies to invest in America? Furthermore, why would they support a policy of investing abroad and disinvesting domestically, which would result in weaker growth and increased unemployment in their economy?

The ultimate goal of Trump's tariff policy is not a "zero tariff" world, as this would still position the US as the highest cost producer. Additionally, it would not result in the on-shoring of investment to the US or produce the tax revenue that Trump asserts his policy will provide.

Critics argue that the 1994 NAFTA agreement was a failure because it did not halt the decline in American car manufacturing or prevent job losses. NAFTA 1994 was far from perfect. However, thanks to NAFTA, significant investments, and the establishment of supply chain networks, US firms were able to stay competitive and prevent a decline that would have been more rapid and extensive without NAFTA.

The concept of "free trade zones" was included in Ronald Reagan's 1980 presidential campaign. President Reagan signed a "free trade zone" agreement with Canada in 1988, and due to the efforts of Presidents Bush and Clinton, Mexico was incorporated into the agreement in 1994.

After signing the 1988 agreement with Canada, President Reagan made the following comments.

"Yet today protectionism is being used by some American politicians as a cheap form of nationalism, a fig leaf for those unwilling to maintain America's military strength and who lack the resolve to stand up to real enemies—countries that would use violence against us or our allies. Our peaceful trading partners are not our enemies; they are our allies. We should beware of the demagogues who are ready to declare a trade war against our friends—weakening our economy, our national security, and the entire free world—all while cynically waving the American flag. The expansion of the international economy is not a foreign invasion; it is an American triumph, one we worked hard to achieve, and something central to our vision of a peaceful and prosperous world of freedom."

President Reagan's words from nearly four decades ago resonate strongly today as President Trump seeks to transform the global landscape of trade and manufacturing. President Trump claims his tariff policy will bring "short-term pain and long-term gain," but a more accurate assessment would be "short-term pain and long-term decline." Trump's tariff policies serve as a "loud" warning to investors.