Despite Trump, Ford moves ahead with plans for Mexico plants

[Draco-Onis]

The state I live in thrives off its exports, so a tariff war will !@#$ us over bigtime if foreign markets start turning protectionist towards their own products in return.

Tariffs will screw consumers, create a trade war and in a twist of fate strengthened the dollar which will increase the trade deficit. This a poor method of addressing trade imbalances I hope they are not that stupid but the Trump administration has proven me wrong on that time and time again.

[primalmatter]

You said "at least the states will benefit", how will a tariff benefit them? Or did you mean "the US" when you wrote "the states".

The US

/10chars

[Glorious Leader]

Let's see if he actually goes ahead with the tariffs. Somehow I doubt it. To be fair he's kept a bunch of promises so far. I mean he's not locking her up, he's probably gotta worry that he won't be locked up at this point but he's authorized the wall right?

[Kiri]

Give him time, he can always just increase the taxes, and make Ford not worth buying in comparison to their competition. You don't really think that if people have to fork more money, where they could pay less they would still go for Ford?

A 30% border tax would not just hit Ford. It would hit almost every automobile producer, simply because most of them buy parts from other countries etc. Unless you find a car manufacturer with the same capacities and economies of scale that exclusively generates cars exclusively in the US, all of them would face a higher cost.
That is the setup. And now remember one tiny little thing: car demand is not very price elastic in the US. Consider also that most cars in the US are sold not from a manufacturer to a consumer. They are sold by car dealerships, which usually buy the cars from the manufacturers. Hence that 30% tariff is less than 30% of the retail price to begin with. Now, considering that the invoice prices (that are paid by dealers) would increase across the board as all manufacturers are hit and that a border tax such as the one proposed by Trump so far would increase the general price level of goods as almost all retailers would be hit in some manner, you can be pretty sure that car dealers would simply increase the retail price of cars in general by ten to twenty percent. If sales take too much of a hit, they might decrease that first - but the manufacturers still get the same amount of money.

Is it possible that eventually the loss of demand will sufficient to get them to want to move back? Maybe. But then you run into another problem. Namely, that of time and offset. Those with manufacturing capacities in Mexico would have to heavily invest in moving those to the US. It isn't like the US has factories that suit their needs that these companies can just move in and get going. It takes an investment in both time and money to move these jobs back to the US. The loss in demand has to be substantial enough that it would warrant closing facilities in Mexico (which likely have not yet paid themselves off, i.e. net loss that they just have to accept) and build new factories in the US. That is a big investment that is not done lightly. Doing all that would also take at the least a year to move production. Trump has already proven that an administration's policies are only good for 4-8 years in the current political environment.
Furthermore, wage costs are higher in the US, so a part of the price increase would still have to persist even after a move, or they just accept a loss in revenue. Either way, not just the act of moving is costly, producing in the US also comes with a comparative disadvantage.
Hence the loss in demand of a price increase of less than 30% amidst a general price level increase has to be strong enough to decrease profits in the next 3-7 years sufficiently to off-set the cost of moving and operating at higher cost levels for the years to come.

Do you think it will be?

Edit:

Let's see if he actually goes ahead with the tariffs. Somehow I doubt it. To be fair he's kept a bunch of promises so far. I mean he's not locking her up, he's probably gotta worry that he won't be locked up at this point but he's authorized the wall right?

Well, he issued an EO that reaffirms that he is totally going to build the wall. Eventually. If the budget for it is approved.

[Glorious Leader]

A 30% border tax would not just hit Ford. It would hit almost every automobile producer, simply because most of them buy parts from other countries etc. Unless you find a car manufacturer with the same capacities and economies of scale that exclusively generates cars exclusively in the US, all of them would face a higher cost.
That is the setup. And now remember one tiny little thing: car demand is not very price elastic in the US. Consider also that most cars in the US are sold not from a manufacturer to a consumer. They are sold by car dealerships, which usually buy the cars from the manufacturers. Hence that 30% tariff is less than 30% of the retail price to begin with. Now, considering that the invoice prices (that are paid by dealers) would increase across the board as all manufacturers are hit and that a border tax such as the one proposed by Trump so far would increase the general price level of goods as almost all retailers would be hit in some manner, you can be pretty sure that car dealers would simply increase the retail price of cars in general by ten to twenty percent. If sales take too much of a hit, they might decrease that first - but the manufacturers still get the same amount of money.

Is it possible that eventually the loss of demand will sufficient to get them to want to move back? Maybe. But then you run into another problem. Namely, that of time and offset. Those with manufacturing capacities in Mexico would have to heavily invest in moving those to the US. It isn't like the US has factories that suit their needs that these companies can just move in and get going. It takes an investment in both time and money to move these jobs back to the US. The loss in demand has to be substantial enough that it would warrant closing facilities in Mexico (which likely have not yet paid themselves off, i.e. net loss that they just have to accept) and build new factories in the US. That is a big investment that is not done lightly. Doing all that would also take at the least a year to move production. Trump has already proven that an administration's policies are only good for 4-8 years in the current political environment.
Furthermore, wage costs are higher in the US, so a part of the price increase would still have to persist even after a move, or they just accept a loss in revenue. Either way, not just the act of moving is costly, producing in the US also comes with a comparative disadvantage.
Hence the loss in demand of a price increase of less than 30% amidst a general price level increase has to be strong enough to decrease profits in the next 3-7 years sufficiently to off-set the cost of moving and operating at higher cost levels for the years to come.

Do you think it will be?

Edit:


Well, he issued an EO that reaffirms that he is totally going to build the wall. Eventually. If the budget for it is approved.

Good point. I mean he made an effort for the wall, the lock her up shit he basically abandoned.

[Espe]

Dat MAGA tho.

Beat me to it.

[Astalnar]

A 30% border tax would not just hit Ford. It would hit almost every automobile producer, simply because most of them buy parts from other countries etc. Unless you find a car manufacturer with the same capacities and economies of scale that exclusively generates cars exclusively in the US, all of them would face a higher cost.
That is the setup. And now remember one tiny little thing: car demand is not very price elastic in the US. Consider also that most cars in the US are sold not from a manufacturer to a consumer. They are sold by car dealerships, which usually buy the cars from the manufacturers. Hence that 30% tariff is less than 30% of the retail price to begin with. Now, considering that the invoice prices (that are paid by dealers) would increase across the board as all manufacturers are hit and that a border tax such as the one proposed by Trump so far would increase the general price level of goods as almost all retailers would be hit in some manner, you can be pretty sure that car dealers would simply increase the retail price of cars in general by ten to twenty percent. If sales take too much of a hit, they might decrease that first - but the manufacturers still get the same amount of money.

Is it possible that eventually the loss of demand will sufficient to get them to want to move back? Maybe. But then you run into another problem. Namely, that of time and offset. Those with manufacturing capacities in Mexico would have to heavily invest in moving those to the US. It isn't like the US has factories that suit their needs that these companies can just move in and get going. It takes an investment in both time and money to move these jobs back to the US. The loss in demand has to be substantial enough that it would warrant closing facilities in Mexico (which likely have not yet paid themselves off, i.e. net loss that they just have to accept) and build new factories in the US. That is a big investment that is not done lightly. Doing all that would also take at the least a year to move production. Trump has already proven that an administration's policies are only good for 4-8 years in the current political environment.
Furthermore, wage costs are higher in the US, so a part of the price increase would still have to persist even after a move, or they just accept a loss in revenue. Either way, not just the act of moving is costly, producing in the US also comes with a comparative disadvantage.
Hence the loss in demand of a price increase of less than 30% amidst a general price level increase has to be strong enough to decrease profits in the next 3-7 years sufficiently to off-set the cost of moving and operating at higher cost levels for the years to come.

Do you think it will be?

One of the beautiful things about the USA, that most other countries don't have is the buying power. So Trump can actually affort to introduce such an exorbitant border tax. Not because people have that much money, but because the USA has so many consumers spending money. That means, the competition will always emerge among the suppliers. The best thing USA can actually do, is return to its protectionsit stance started by Alexander Hamilton which existed pretty much intact all until after the WW2.

Now let us presume that Trump is being truthful and does introduce punitive measures for companies who go against him. For the companies, no matter how they decide to act, it is a lose-lose scenario. The only question is how much of a lose will they make it be. If they decide to call Trump's bluff and then end up screwed over, they are facing some real financial loss, and you can bet that Trump will not jump to save those who abandoned his ship. On the other hand, the companies that comply will probably face some financial hit as well, there is no denying, they'll be getting screwed too, but at least they're getting some money out of it in return.

Now I might be biased, but when it comes to Trump I find it naive to the extreme to ever think the man is bluffing. When he says something, it's better, and safer to presume he means it, and take him seriously. To act otherwise as a business is irresponsible to say the least. He is flippant, boisterous, vindictive, and all that. But one thing he is not, is a bluffer. He's a bull, you show him the red flag, and he will charge. And we should accept that by now as a given. People thought he was bluffing about the wall, and the muslim ban. It wasn't even a month, and some of his most "controversial" pledges were made true.

[God Save The King]

Of course they will. What do you think Ford's biggest market is.

I can't imagine buying a car that'll rust out in 5 years, and be a block of scrap metal in a decade :P

[Mifuyne]

Better hope they don't plan to sell any of that shit in America.

Why not? shit president, shit product.

[NED funded]

A 30% border tax would not just hit Ford. It would hit almost every automobile producer, simply because most of them buy parts from other countries etc. Unless you find a car manufacturer with the same capacities and economies of scale that exclusively generates cars exclusively in the US, all of them would face a higher cost.
That is the setup. And now remember one tiny little thing: car demand is not very price elastic in the US. Consider also that most cars in the US are sold not from a manufacturer to a consumer. They are sold by car dealerships, which usually buy the cars from the manufacturers. Hence that 30% tariff is less than 30% of the retail price to begin with. Now, considering that the invoice prices (that are paid by dealers) would increase across the board as all manufacturers are hit and that a border tax such as the one proposed by Trump so far would increase the general price level of goods as almost all retailers would be hit in some manner, you can be pretty sure that car dealers would simply increase the retail price of cars in general by ten to twenty percent. If sales take too much of a hit, they might decrease that first - but the manufacturers still get the same amount of money.

Is it possible that eventually the loss of demand will sufficient to get them to want to move back? Maybe. But then you run into another problem. Namely, that of time and offset. Those with manufacturing capacities in Mexico would have to heavily invest in moving those to the US. It isn't like the US has factories that suit their needs that these companies can just move in and get going. It takes an investment in both time and money to move these jobs back to the US. The loss in demand has to be substantial enough that it would warrant closing facilities in Mexico (which likely have not yet paid themselves off, i.e. net loss that they just have to accept) and build new factories in the US. That is a big investment that is not done lightly. Doing all that would also take at the least a year to move production. Trump has already proven that an administration's policies are only good for 4-8 years in the current political environment.
Furthermore, wage costs are higher in the US, so a part of the price increase would still have to persist even after a move, or they just accept a loss in revenue. Either way, not just the act of moving is costly, producing in the US also comes with a comparative disadvantage.
Hence the loss in demand of a price increase of less than 30% amidst a general price level increase has to be strong enough to decrease profits in the next 3-7 years sufficiently to off-set the cost of moving and operating at higher cost levels for the years to come.

Do you think it will be?

Edit:


Well, he issued an EO that reaffirms that he is totally going to build the wall. Eventually. If the budget for it is approved.

For some reason I'm not convinced with this explanation. **NOTE** I think protectionism is bad policy.

What you are saying is the following (I'll remove the elegant english so it's easier to follow):

a) People do not like when cars increase in price.
b) Manufactures barely affected as retailers do the selling part.
c) Investment takes time and money and the presidency would have to hold out at the very least 2 years of bad policy.

Border taxes often include a subsidy. So cars would not necesarily increase their price that much and with some increase in wages the effect would be minimal. In addition moving into the US would not prove to be that expensive.

[minteK917]

In addition moving into the US would not prove to be that expensive.

What? Some of the windshield parts we make in mexico would easily be 400% more expensive if it wasent made in mexico. If you think that kind of low labor is coming back because of a 30% tax, you are down right dreaming. Hell even if we made them in Canada it would still be too expensive lol.

[AlphaOut]

This is extremely old news. They were never going to ditch a plant in Mexico, even trump said that. What they were going to do is make the factory in Mexico produce less popular vehicles, and their American factory produce the most popular ones - I forgot the name... focus maybe? Originally their plan was to ditch x amount of factories in the US, but instead they opted to keep them operational. Unless that has changed, this article comes to no surprise.

[Tsar Bomba]

Going to suck when the consumers will have to pay a 30% tariff.*

Don't worry they won't.

[NED funded]

What? Some of the windshield parts we make in mexico would easily be 400% more expensive if it wasent made in mexico. If you think that kind of low labor is coming back because of a 30% tax, you are down right dreaming. Hell even if we made them in Canada it would still be too expensive lol.

You can subsidise said companies and/or invest on capital.

[SoulForge]

Give him time, he can always just increase the taxes, and make Ford not worth buying in comparison to their competition. You don't really think that if people have to fork more money, where they could pay less they would still go for Ford?

There are people who buy big ass trucks with 4 wheels on the back and 2 MPG and joyride in them.

So...........YES.

[Wyrt]

Why would people buy American cars anyway when foreign cars are better?

[xChurch]

People should be starting to realize now that the only way manufacturing is coming back to the US is if it's done completely by robots. It as a human task is nearing it's end, outsourcing was a problem that needed to be fought years ago, it's pretty much pointless now since even China is on an automation drive.

[Rasulis]

Ford may not be bringing the parts back to the US. It is possible that the parts will be shipped to their factories in China. US car manufacturers sold 5.6 million vehicles in China in 2016. China is GM biggest market now (not US). Ford has been trying to compete with GM in China & Mexico’s labor is way cheaper than China right now.

- - - Updated - - -

Why would people buy American cars anyway when foreign cars are better?

The Chinese for some reason likes American cars.

[Delana]

Im all for good american manufacturing jobs, whatever jobs, good jobs. I just don't see how you get them out of a tariff. I think the businesses should be investing in making their own workers more productive, maybe this will be incentivized if production has to be at home? Possible.

Using this : https://www.quora.com/What-percentag...l-car-is-labor
Average auto worker makes about $65-95 an hour? The average mexican manufacturing worker makes $2 an hour? So I guess I dont see the small benefit, it seems like a huge one potentially, though, I of course dont know the levels of productivity for these different workers, just their wage rates. But so even if labor cost is currently only 10%, aren't we trying to add more of these jobs? Won't there be a point in the calculus where the labor slack is no more? Where wages rise and therefore that 10% rises?

All not factoring in at all that current production levels are a mixture of different places. 50% of the production cost is in making the new plant. Not to mention the 20-30% cost of materials. Where do the now american only produced cars get their materials from, only at home? I don't even think we have the raw resources for this I could be totally wrong though. If theres a 30% tariff or even the 20% import tax across the board, all those materials, used in american production, would also be more costly no?

About 6 million vehicles were made in the US. About 2 million were "cars", while the rest are commercial vehicles. (http://www.oica.net/category/production-statistics/) Nearly 7 million were bought, from what I can tell these are regular passenger cars.(https://www.statista.com/statistics/...es-since-1951/). Thats a lot of calculus to change. A lot of input prices to figure out and labor levels to optimize for given you want to produce 5 million more cars and will probably have to incur capital costs to up your level of domestic production. Of course look at car production around the world. The us makes way more motorized vehicles than mexico. You will notice though, that more passenger, instead of commercial vehicles, are produced in Mexico. Theres your comparative advantage, not the tariff. Advanced manufacturing sectors that are more productive but offer fewer jobs are also an american comparative advantage currently (and to come).

I suppose you can say the tariff is needed to make sure these jobs dont go to mexico? Ok sure maybe. But remember, only 1.7 million cars are produced in mexico. 12 million produced in China. Oh look we produce many more commercial vehicles while they produce more passenger...interesting. I understand wanting to protect the well being of the people in your country. But when all you look at are raw aggregate numbers youre not doing that. Youre not accounting for the nuance of how we can be the second largest car producer in the world, and still import more in terms of dollars of passenger vehicles. You're not accounting for that, if you really want to shut off, ok, but the kinds of cars and production capacity we have here is different from other countries. We can definitely produce 7 million passenger cars a year. The question is the cost. The question is how will the now tapped (after we increase passenger car production by 5 million) labor supply and need for capital investment to raise production capacity changes the costs within the American market. Unless we are assuming our current production can be traded one for one with no cost? maybe.

Anyway Id love to see you actually doing the calculus problem, if you have access to these production functions in a way most don't.

Your short run calculation probably works. The long run (in which capital can change, ie number of factories ie 50% of the cost) is why the 30% tariff is not enough, and the ensuing change in production techniques and labor market, and changes in consumption and price levels. Also again, if we are shrinking the pie of the world, who will buy our exports? You can make a closed market I suppose, but have you calculused out the options and costs of that?

TLDR you are not accounting for how exogenous parameters will change in the long run and then influence the endogenous variables of the optimization problem

I do appreciate the well thought out post. My comment certainly didn't warrant such a thing.

There's obviously nuance below the surface. You've gotten to some of it. I'm sure the question is really miles deep and almost as wide. There are people that get paid handsomely to do this sort of thing. I'm a simple physicist. When policy needs an infrared spectroscopist, I'll be the first to weigh in with a more technical analysis.

The point I'm trying to make, and it's certainly a debatable one, is that before Trump, concern for the American worker seemed to be at an all time low. And I can attest first hand how much worse it is in the rust belt now than it was when I was growing up.

We have obvious negotiating leverage just from being the world's largest consumer market. I would hope, and advocate, that we use some of that to keep manufacturing here (or bring it back), and keep the American worker employed. Is it a subsidy? Obviously. Is it a bigger subsidy than paying them welfare? Hell if I know. Are there societal benefits to having them employed instead of on the dole? I believe there are. Certainly it's more satisfying for the workers themselves.

America (and ultimately the American worker) right now is a victim of our own success. The American worker built an economy that was so laughably strong compared to the rest of the world, that it became economically preferable to not employ them anymore, but to build elsewhere and sell to them. That's a fucked outcome for the little guy that was just doing his job. They just want to do hard work for good pay. There's no shame in that, even though they've been called racists and Nazis and worse this cycle.

Just bothers me to see one party (both parties pre Trump) embrace is shit outcome with open arms. At the very least I'd like to go down swinging.

[Kiri]

One of the beautiful things about the USA, that most other countries don't have is the buying power. So Trump can actually affort to introduce such an exorbitant border tax. Not because people have that much money, but because the USA has so many consumers spending money. That means, the competition will always emerge among the suppliers. The best thing USA can actually do, is return to its protectionsit stance started by Alexander Hamilton which existed pretty much intact all until after the WW2.

Now let us presume that Trump is being truthful and does introduce punitive measures for companies who go against him. For the companies, no matter how they decide to act, it is a lose-lose scenario. The only question is how much of a lose will they make it be. If they decide to call Trump's bluff and then end up screwed over, they are facing some real financial loss, and you can bet that Trump will not jump to save those who abandoned his ship. On the other hand, the companies that comply will probably face some financial hit as well, there is no denying, they'll be getting screwed too, but at least they're getting some money out of it in return.

Now I might be biased, but when it comes to Trump I find it naive to the extreme to ever think the man is bluffing. When he says something, it's better, and safer to presume he means it, and take him seriously. To act otherwise as a business is irresponsible to say the least. He is flippant, boisterous, vindictive, and all that. But one thing he is not, is a bluffer. He's a bull, you show him the red flag, and he will charge. And we should accept that by now as a given. People thought he was bluffing about the wall, and the muslim ban. It wasn't even a month, and some of his most "controversial" pledges were made true.

Let me address Trump and bluffing first: Yeah, I don't think he is bluffing on such things. However, just because he seeks to push the things through that he said he would does not mean they will ultimately materialize. The Muslim ban was put in place and promptly put on hold. He might get something similar in place now, but by now, and I sadly have to give him credit there, even though he likely did not mean it that way, most of those that would have used these channels to come into the US will have. But that was always a kind of self-fulfilling prophecy. Announce that you will ban people and they will pour in before it is properly in place. That's why he rushed it out as was, ultimately shooting it in the foot because he did not properly work it out (as his new EO on the matter might be).
The wall, well, we will see. That has to be approved by quite a few people. I believe that he wants to get it built, but whether his party will support it is not fully sure just yet.

Either way, regarding cars. What I mean is not necessarily that it is a bluff, but more that the tax on foreign goods might only be in place for 3 years. You can tell already that if the democrats get into a position to undo that, they will. That's why the loss of demand has to be substantial in order for companies to go and move instead of weathering out the storm.
Regarding buying power: it is true that the US as a whole has a lot of buying power. But that buying power is mostly concentrated on the upper class/the upper middle class. For the lower and middle classes, an increase in prices does affect their buying power substantially. Returning to a protectionist stance would knock out most of the major retailers pretty quickly, as the US imports a lot of goods. Over time, yes, the US could return to old levels of productivity, but that is a long term project. In the short term, you would have an increase in the cost of living that most households simply could not afford without higher wages etc. Competition will emerge, but remember the aggressive nature of the American economy, which means that quite a few people will lose a lot over this.
And the question ultimately is: for what gain? You said protectionism would be the best thing to do. Why? Basic economic theory suggests that it will only cause inefficiency and lower wealth overall. There were reasons why most countries in the world gave up on protectionism, and those reasons usually involved mutual gain. There are other means to get more people employed in the US. Just a majority of the EC did not vote for them.

For some reason I'm not convinced with this explanation. **NOTE** I think protectionism is bad policy.

What you are saying is the following (I'll remove the elegant english so it's easier to follow):

a) People do not like when cars increase in price.
b) Manufactures barely affected as retailers do the selling part.
c) Investment takes time and money and the presidency would have to hold out at the very least 2 years of bad policy.

Border taxes often include a subsidy. So cars would not necesarily increase their price that much and with some increase in wages the effect would be minimal. In addition moving into the US would not prove to be that expensive.

Ah sorry, I was not trying to be elegant. It is just how economists talk, sorry:/
Anyway, the line of thought for the 'bring jobs back to America' narrative basically goes like this:
Tax cars that are produced elsewhere-->price increases-->demand falls-->companies producing elsewhere lose earnings-->they move back to the US
I attacked this on multiple points:
A) Because cars are sold by retailers, a 30% increase on the invoice price is not a 30% increase on the retail price, so demand is affected less
B) Even manufacturing plants in the US import raw material or parts from other countries, so even prices for US-made cars increase, so their advantage over those who produce in Mexico falls
C) Operating costs in the US are higher, so if you have say a 10% loss in revenue due to the tax, only like 7% of that would be regained by operating in the US
D) Moving production back into the US will cost money, so the demand-induced gap needs to be big enough
E) Moving production back into the US costs time, during which they have the negative effects of the tax still, diminishing the value of moving back - especially if Trump should only make one term (with Democrats likely giving up on the tax should they come into power)

Due to these points I conclude that Trump needs to induce a very strong loss in demand for cars made elsewhere, in order for his plan to work. A 30% tax - if he can even get it through...congress was it?.... might not be enough to do so.