Luxury Auto Industry May See Break from Tariffs, But New Problem Looms

Luxury car companies and other automakers watched Washington, D.C. this week as the White House and Mexico met to strike a new deal.

The President and his supporters in the press all sing the virtues of discarding the North American Free Trade Agreement in favor of a new deal. However, the process is still very much in flux and nothing specific is set in stone yet. After a very public disagreement with Canadian officials, the White House now chooses to focus on Mexico. While this deal could possibly bring some relief to the auto industry suffering from the current disputes, consumers may ultimately be the ones who lose this “trade war.”

Range Rover

Credit: Range Rover

Why is Mexico Important to the Auto Industry?

Sure, most hotly desired luxury cars come from countries like Italy or in the U.S. itself. However, many of those cars are actually assembled in Mexico. Thanks to NAFTA, automakers in the U.S. and Canada avail themselves of a cheap labor market in Mexico. This means they pay those employees much less than they do their employees in the United States. In fact, it’s not just the luxury auto industry affected by this. The Carrier Air Conditioner factory in Indiana that became a flagship issue for the President was planning to move their operation to Mexico. They struck a “deal” with the White House, but most of the jobs went to Mexico anyway.

Credit: Porsche

Mexico is also important in another, more political way. After Canadian Prime Minister, Justin Trudeau, rebuked President Donald Trump publicly, the proposed “deal” with Mexico is meant to force Canada to the table with the U.S. Trudeau, for his part, wants to merely amend NAFTA rather than starting the whole deal from scratch again. Of course, as the U.S. “ask” of Mexico with respect to the auto industry, it sounds like a bad deal for everyone. As a way to offset the cheap labor costs, the White House wants slap a 25 percent tariff on some Mexican-made cars imported into the U.S.

What’s Actually In the Deal?

Donald Trump trump luxury hotel

As big as the talk has been about what the White House hopes to get from Mexico in concessions, the numbers reported aren’t that drastic. Cautious experts on the industry think that the way the auto industry does business won’t change much. Mexican-made cars can avoid tariffs if they meet specific requirements. 

First, the deal states that 40- to 45 percent of the car must be made by workers earning at least $16 per hour. This is meant to create wage parity between Mexico and the U.S. But, that hourly wage is actually somewhat low for the median auto factory employee’s salary.

Second, the deal stipulates that three-quarters of the cars’ parts are manufactured in North America. This is more of a shot across China’s bow than anything. This provision doesn’t help U.S. manufacturers competing with Mexico and Canada, which is why the president’s supporters wanted the change.

What Does This Mean for the Luxury Auto Industry?

You might think that while this might be bad for the auto industry at large, because prices will go up, the luxury car industry won’t be affected that much. Those cars come from Germany or Italy, right? Well, unsurprisingly, even luxury car manufacturers like to save money on labor.

Lamborghini, Mercedes Benz, Jaguar, Cadillac, Maserati, Porsche, and dozens of other luxury brands have a presence in Mexico. In fact, if you own one of those cars, the chances are good it was assembled south of the Rio Grande. However, there is another wrinkle in the industry happening because of White House policy that seems more to be “red meat” for their supporters in advance of the upcoming election than good business. Specifically, the White House is throwing the industry into disarray by undoing the 2012 fuel emissions standards implemented by the previous Administration.


Credit: Jaguar

Taking aim specifically at California’s ability to set their own fuel emissions standards, the White House just kicked off a policy fight that could spend years in the courts. This puts automakers in a tough spot. Those like Jaguar or Tesla, who are committed to dumping fossil fuels entirely, won’t really be affected. However, larger companies will be stuck in a kind of limbo.

Automakers didn’t appreciate the new standards, saying they were too ambitious. Nonetheless, they were forced to throw more resources at the problem than they would otherwise. Now, it’s unclear if that expenditure can be justified without the regulations requiring it. Even if the company wants to do the right thing and lower fuel emissions standards, their shareholders might not allow it in favor of short-term profit.

The Drama of the “Trade War” Is Not Going to End Anytime Soon.

It is impossible to know how much of these recent moves are based on a cogent policy strategy and how much is just political theater for the upcoming midterm elections. Ultimately, though, it doesn’t matter, because the effects of this debate are very real. Done incorrectly, this new deal could lead to higher car prices, lower wages across-the-board, and delays in the advancement of energy-efficient technology.

However, it’s hard to speculate about what the result of this deal would look like if it were done correctly. The campaign promises a surge of well-paying, manufacturing jobs returning to the United States from abroad. This is so unlikely, it might as well be fiction. Whether they are fighting this fight in good-faith or just for political points, it's almost impossible to for them to win it. 

What do you think? Will the trade dispute result in a fair and advantageous deal? Share your thoughts, feelings, and reactions in the comments below. Remember to share the article on social media so your friends can get in on the conversation. 

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