The curse of living in interesting times is yet again upon product planners in the automotive space, who now have to contend with how literally to take the future President of the United States when he says stuff like he’s going to put a tariff on all goods coming from Mexico and Canada.
I think most readers of The Morning Dump are well aware that when they buy an American car there’s a good chance it’s not made in America, and when they buy a car from a foreign brand there’s a good chance it is. Buying a new Tundra? There’s a 100% chance that Tundra is made in America. A Silverado? Depending on which one you get it could be made in America, or it could be made in Canada or Mexico.
Of course, all of these cars have bits and pieces from all over the world. And companies all over the world are concerned about the potential for a global trade war. This is especially true in Europe, where things are a little shaky at the moment.
I’m not particularly in the mood to write about cars and politics this morning, but the two are colliding as California not-so-quietly implies it’ll retaliate against Tesla if the $7,500 federal tax credit goes away. Companies that aren’t Tesla need that credit, especially as the electric market continues to stumble. Just ask Porsche.
We Must Protect The Ford Maverick At All Costs
I’ve probably said this before, but my old Representative back in Texas once famously said that you should take President Trump “Seriously, but not literally.” What I think he was saying was that you should assume the administration wants something, even if the suggested method to get it isn’t necessarily going to happen.
Presidents threatening to use their power to get what they want is nothing new. When the Supreme Court threatened to derail FDR’s agenda he moved to pack the court, which got them to back off just a little bit and approve certain measures. The difference with President Trump is the scale and magnitude of these threats (or promises, depending on how you look at them), which come fast and, at least in his previous term, he didn’t always follow up on.
Here’s what President-Elect Trump had to say:
As everyone is aware, thousands of people are pouring through Mexico and Canada, bringing Crime and Drugs at levels never seen before. Right now a Caravan coming from Mexico, composed of thousands of people, seems to be unstoppable in its quest to come through our currently Open Border. On January 20th, as one of my many first Executive Orders, I will sign all necessary documents to charge Mexico and Canada a 25% Tariff on ALL products coming into the United States, and its ridiculous Open Borders. This Tariff will remain in effect until such time as Drugs, in particular Fentanyl, and all Illegal Aliens stop this Invasion of our Country! Both Mexico and Canada have the absolute right and power to easily solve this long simmering problem. We hereby demand that they use this power, and until such time that they do, it is time for them to pay a very big price!
I’m not going to address any of the specific reasoning here, though it’s clear that immigration was an issue for some voters and that President Trump will make addressing it a big part of his agenda.
I will try to explain why this might impact the car market, which is heavily globalized and relies on production in Canada and Mexico (as well as China). The United States has largely worked to expand manufacturing to its neighbors in order to increase trade and lower costs, as it did with NAFTA (under President Clinton) and the USMCA (under President Trump).
While this has resulted in job losses, it has also resulted in more affordable vehicles for car buyers either through direct production in Canada or Mexico, or, often, via parts made in one of those countries.
If you’re a car buyer, you want to pay attention this as popular vehicles like the Honda CR-V, Toyota RAV4, Chevy Silverado, Ford Maverick, and Chrysler Pacifica all have at least some of their production north or south of the border. How does a tariff work and who pays it? I’ll let Bloomberg explain:
How do tariffs work?
A tariff, also known as a duty or levy, is usually calculated as a percentage of a good’s value (as declared during the customs clearance process.) It can also be levied as a fixed amount on each item. Goods that cross borders are given numeric codes under a standardized nomenclature called the “international harmonized system.” Tariffs can be assigned to specific product codes relating to, for example, a truck chassis, or to broad categories, such as electric vehicles. Customs agencies collect tariffs on behalf of governments.Who pays tariffs?
Tariffs are paid by the importer, or an intermediary acting on the importer’s behalf, though the costs are typically passed on. Trump argues that, ultimately, it’s the exporter who effectively ends up shouldering the cost of a tariff. Studies have shown the burden is more diffuse. The foreign company that makes the product may decide to lower prices as a concession to the importer. Or it might spend significant sums to build a factory somewhere to sidestep the tariff. Or an importer — Walmart and Target are among the biggest in the US — could raise prices of the item when it’s sold on. In this case, it’s the consumer who shoulders the tariff cost indirectly.
That cost thing is important. While it’s possible that automakers can take the hit themselves, the lesson of the pandemic was that companies will take any excuse to raise prices (check out my favorite economist Isabella Weber’s new paper analyzing earnings calls that shows how this works). In the auto space, we saw that automakers did this via trimflation. Can consumers even stomach pandemic prices again? Probably not.
Car prices have remained stubbornly high this year and increased tariffs, eventually, will find their way to the consumer. That’s assuming Trump is being literal. It’s possible this is all just bluster and new policies from Canada or Mexico will placate him before he takes office.
Or he could start a trade war.
How To Start A Trade War
European carmakers are worried about everything. And they should be worried about everything. In the 20th century, when large nations or groups of nations disagreed, it tended to result in a war across Europe. There’s a way to view the War in Ukraine as a 21st-century equivalent.
The world is a complex place and one small tariff over here can lead to an unpredictable response. As Reuters reports, European car stocks were down today as traders embraced exactly those fears:
European automakers shares fell on Tuesday, as traders reacted to President-elect Donald Trump pledging big tariffs on Canada, Mexico and China, news that fueled jitters over a potential global trade war.
A basket of European autos and parts stocks was the worst performing sector in Europe, down 1.7% versus a 0.7% fall for the broader STOXX 600.
This is basically the mood right now for European automakers and suppliers:
Side note: Do I need to watch “The Hunt For Red October” again tonight? I feel like I need to watch THFRO again.
I’m being a tad dramatic, but just a tad. What happens if China freaks out and retaliates? What about Mexico? If you’re a Stellantis exec what do you even do with this news? Stellantis makes about 25% of its cars for the United States market in Mexico, which is to say nothing of the parts and vehicles made in Canada.
The confusing thing about Trump’s pronouncements is not that he’s saying he will increase tariffs. All modern presidents use the power of tariffs to get what they want. President Biden largely continued or increased tariffs created under the Trump administration. The issue is that they’re aimed at everything as opposed to the usual extremely targeted tariffs the markets are used to (as in President Biden’s tariffs on Chinese EVs or the EU’s tariffs on… Chinese EVs).
If you want to know how much of your car has parts from outside the US you can check out htis table.
California’s War On Tesla
Tesla would perhaps not exist without the EV-forward environmental policies of California. But the Tesla CEO Elon Musk hasn’t exactly thanked the state by moving to Texas and embracing Donald Trump.
So far, Musk’s embrace of conservative politics has worked, with Tesla’s stock (and therefore his wealth) increasing dramatically immediately post-election. It took a quick turn in the other direction yesterday as California Governor Gavin Newsom responded to President-elect Trump’s threat to kill the tax credit for EVs with his own threat aimed at Musk.
Newsom said on Monday that if Trump eliminates a federal EV tax credit, he will propose creating a new version of the state’s Clean Vehicle Rebate Program that ended in 2023 and spent $1.49 billion to subsidize more than 594,000 vehicles.
“The governor’s proposal for ZEV rebates, and any potential market cap, is subject to negotiation with the legislature. Any potential market cap would be intended to foster market competition, innovation and to support new market entrants,” his office said.
There’s a lot to unpack here. First, Tesla is the only carmaker who builds EVs in California, so threatening your one domestic EV-maker seems short-sighted. While Tesla’s cars are cheaper to produce, generally, giving every other automaker a $7,500 credit is going to make Tesla less competitive in America’s biggest EV market.
Even though Tesla is the only company who manufactures their EVs in California!
This is insane. https://t.co/EhVeG2TYqT
— Elon Musk (@elonmusk) November 25, 2024
On the other hand, capped rebates is a way that federal EV credits previously worked and everyone seemed fine with it. This concept of a neverending EV tax credit is a relatively new, IRA-induced idea. Musk himself is for ending subsidies, albeit also on petroleum vehicles and products.
Is any one of this going to happen or is it all bluster? Idek.
Porsche Will Keep Making ICE Vehicles For A Bit Longer
What’s going on with electric cars? Our pal Kristen Lee has a big piece over at MotorTrend above that gets into what’s happening with electrification. I won’t spoil the ending, so go watch it.
Porsche was kind of the tip-of-the-spear when it came to Volkswagen’s larger electric ambitions, which is why it’s noteworthy that Porsche is backing off its plans a bit.
Porsche said it will develop new combustion-engine derivatives across its model range to meet customer demand as sales of full-electric cars fall.
“There is a clear trend in the premium luxury segment in the direction of combustion-engine cars, therefore we will react in our product cycle,” Porsche CFO Lutz Meschke said.
The electric share of Porsche’s vehicle sales fell to 7.3 percent through September from 12 percent the same period the year before as sales of the Taycan battery-electric sedan and wagon slumped.
Welp. The new Taycan wagon looks great. Given unlimited money I think that’s what I’d probably buy if I was going to buy a new EV.
What I’m Listening To While Writing TMD
I’m in a weird mood today, so let’s all put on Detroit’s own Electric Six and their great “Gay Bar.” Let’s start a war, let’s start a [trade] war… at the gay bar, gay bar. I’m sure someone will share the actual video in the comments.
The Big Question
How much of your car was made in the United States or Canada? If it’s a newer car you can refer to this chart for some clues.
The Hunt for Red October is one of the fastest ways to subdue me for two hours. The more I see it the happier it makes me, even if (especially because) the accents are all ridiculous. And ever so quotable.