In-Depth: Trump is right - current trade deals unfairly disadvantage the US
The in-depth series is a weekly column looking at hot motoring topics with a political twist.
Throughout recent weeks and months, a key feature of President Trump’s Twitter feed has been the apparent unfairness of current international trade arrangements. Compelled by the all-consuming America First mantra, he alleges that trans-national corporations and other countries seized the opportunity to take advantage of unfortunate circumstances and create manipulative trade deals that disproportionately benefit them at the expense of the US.
Trump rails fairly consistently against trade deficits and so-called bad deals, bemoaning the vulnerability of his country on the international stage. The agreement he reached with European Commission President Jean-Claude Juncker this week gained him several minor concessions for the US, allowing him to hail it as an America First victory. It is sufficient to offset the all-out trans-Atlantic trade war he has been threatening for some time; for now, at least.
This will have done little to quell the fears of market leaders in the various industries that would be profoundly shaken by such a development, one of which is the motoring trade. Measures to address Trump’s key concern - the US being at a deficit in its trade deals - have been negligible so far. The US continues to suffer under these deficits, thanks to the outsourcing of labour by businesses and the excessive and unfair tariffs imposed by various governments.
The problem is a simple one, due almost entirely to this age of free trade and globalisation. Take Mexico, for instance. Carmakers can cut production costs by building their cars there because the labour is cheaper (which is a result of comparatively lax government regulation, giving workers fewer rights and lower wages – but that is an entirely separate debate). Various companies build cars in Mexico and then sell them in the US.
That means that Americans are missing out on the tens of billions of dollars’ worth of investment that they would have enjoyed had those cars been built in their country. Trump has a strong record on unemployment but there are still at least 12 million Americans without jobs, not to mention the substantial boost the USA’s GDP would gain if those companies moved their manufacturing over the border. But why would they, when it is so much cheaper to build cars in Mexico?
The result is a $58bn trade deficit with Mexico (as of 2015). Meanwhile, the US imported $78bn worth of cars from Mexico, meaning that if that manufacturing was relocated north of the border, the US would end up with a trade surplus of $20bn, all thanks to this single industry. Not only would thousands of Americans benefit from those jobs but tens of billions of dollars of extra cash would be swimming around in the American economy, fuelling growth and improving national economic strength.
Trump’s answer to this problem is what he colloquially refers to as a ‘big border tax’. Essentially, he wants to provide those carmakers with a financial incentive to relocate manufacturing to the US. By introducing an import tariff, he would make it more expensive to build cars that are going to be sold north of the border to the south so that it would make fiscal sense for those companies to bring their business and investment into the US.
As well as bringing the jobs and investment back to the US where they rightly belong, the tariffs Trump is threatening would also help to cultivate industry in Mexico. The abysmal current situation has allowed Mexico to become overly dependent on American companies and the dollar; in their absence, there would be a much greater incentive for local companies to invest there to fill the gaps in the jobs market. In essence, tariffs would likely benefit everyone in the long term.
Thus, Trump is absolutely right to target the offending companies harshly, for his condemnation of their business practices is wholly correct. Although they have only made the business choices that make the most sense in the economic climate, Trump’s accusations that they have chosen profits over investment in the US and that his country is suffering as a result are entirely true, hence his threat of tough tariffs to discourage building abroad and importing.
It is that threat which, if enacted, would cause quite a headache for the big businesses, that has caused a ruckus in the media. Motoring bosses have formed a chorus of dissent, howling in union that Trump hates business, when in fact it is they that have been taking advantage of the US for years. Crucially, however, it is not just businesses that are guilty of that, but governments from around the world, too.
Alas, we return to the issue of the threat of a trade war with the EU. At present, the EU imposes a 10% tariff on US-made cars being imported into Europe; that is the fee companies have to pay in order to move their goods, in this case cars, over the Atlantic and sell them in European countries. The tax going the other way is just 2.5%, which means it is four times cheaper for EU companies to sell in the US than vice versa. Clearly, the Americans are at a major disadvantage.
The result of that is that the European bloc exported 37.4bn euros’ worth of cars to the US in 2017, while trade going the other way was just 6.2 billion euros, thanks to those extortionate import fees. Evidently, the American leaders and negotiators that preceded Trump were wildly unsuccessful in their stated bid to obtain the best deal possible for American industry.
Trump has threatened to lift the American tariff from 2.5% all the way up to 20% in an effort to redress the balance and return that money to his country. Though that alone would likely not be sufficient to eliminate the $92bn trade deficit the US has with the EU, it would certainly be a step in the right direction. The world has been taking advantage of the US for a very long time and using the car industry to do it. Trump appears to be the first President in recent memory who sincerely intends to put a stop to it.