Why Trump could lower MPG standards
After enduring threatening tweets and campaign-trail disparagements, CEOs of the two-and-a-half domestic automakers finally sat down with now-President Donald Trump to tell their side of the story. It’s a good bet they mentioned fuel-economy standards.
Trump, of course, is in the midst of a public-private negotiation with the auto industry about how to create more American jobs. Trump has blasted automakers for building some US models in Mexico. General Motors (GM) Ford (F) and Italian-American hybrid Fiat-Chrysler (FCAU) have responded by announcing new investments in the United States and touting the thousands of Americans they already employ. Trump has tweeted his approval, signaling a sort of détente.
But Trump is far from finished, and his next big step could be a threat to withdraw from the North American Free Trade Agreement unless there’s solid evidence of a rebound in US manufacturing employment. Ending NAFTA would wreck automaker profitability, push up car prices and possibly kill as many US jobs as it would create. Trump’s modus operandi, however, is to threaten ruin but settle for something far less draconian, as long as he can declare victory. His meetings and statements are all part of the deal being made.
We know what Trump wants: more manufacturing jobs he can claim credit for. So what do the automakers want? For starters, they’d be delighted if Trump slashed the corporate tax rate, as promised, and threw a few other tax breaks their way. They’d also love some relief from onerous fuel-economy standards President Obama put in place—and tried to make irrevocable right before leaving office.
Easing fuel-economy standards
Trump advisers have suggested he’d consider lowering fuel-economy standards. Trump may have been referring to this during the meeting with the auto CEOs, when he said environmental regulations are “out of control.” Supporters of the current rules are certainly worried Trump will undo Obama’s work. “Trump’s EPA will be looking for ways to lower the standards,” says Timmons Roberts, a professor of environmental studies at Brown University.
In 2012, Obama pushed through new rules that would raise average fuel economy for all cars sold to 54.5 miles per gallon by 2025. That was a huge increase, and automakers played nice only because Obama promised that the government would review the whole regimen in 2018. If the new technology needed to meet those standards didn’t materialize by then, or was too expensive, the number could be lowered, or other terms adjusted.
The Obama administration decided to speed up that mid-point review, completing it last November in an obvious effort to lock in the Obama standards before Trump took office. Auto executives expecting to contribute to the review felt ignored by regulators at the Environmental Protection Agency and the Department of Transportation. “They basically just gave us the finger,” one auto exec said privately at the Detroit auto show in early January.
The question isn’t really whether automakers can meet the strict new standards. They probably can, with a combination of better internal-combustion technology and alternative-energy vehicles such as electrics. But new technology is expensive, and consumers aren’t always willing to pay for it through higher prices. Most automakers are working on electric vehicles, for instance, but they probably wouldn’t be if not for the credits they get toward fuel economy and government rebates that make the cars cheaper. The market alone generally doesn’t support the investment.
Trump is obviously sympathetic to corporate complaints of federal overreach, and he has promised to slash many federal regulations so businesses can operate with a freer hand. It won’t be easy to change the Obama fuel-economy standards, and legal challenges by environmental groups could tie up any attempted changes for years. But litigation doesn’t faze Trump, and he could plausibly tell the automakers he did his share, and dealing with the courts is their problem.
Consequences of eliminating NAFTA
The more confrontational alternative to this kind of horse-trading is a pretty ugly scenario. For the automakers, any deal with Trump needs to retain NAFTA in something similar to its current form. Virtually all automakers selling cars in the United States–including the European and Japanese brands—operate factories in Mexico, where they typically make small vehicles with low profit margins. Many such vehicles can’t be made profitably in the United States, because of high labor costs, no matter what Trump says. Trump’s idea regarding a “border tax,” or tariff on cheap imports, would raise small-car prices, which in theory would provide more revenue for automakers. But fewer people would buy them, and production would become less efficient, pushing costs up.
Nearly 2 million vehicles are shipped to the United States from Mexico each year, about 11% of all cars sold here. And automakers plan to add more capacity in Mexico during the next several years than in the United States. But if Trump killed NAFTA and shackled the Mexican auto industry, those jobs would be more to likely migrate to other low-cost countries than to the United States, according to a new report by the Center for Automotive Research.
Killing NAFTA would also cause widespread disruption in auto-industry supply chains, since most automakers ship parts back and forth between the US, Mexico and Canada. That would destroy more than 30,000 US jobs, according to the CAR report. Inefficiency alone would push car prices up, even without tariffs. Automaker stocks would plummet and Trump would face a PR nightmare as he tried to explain why wrecking auto-industry profits and hiking prices is good for American workers.
Far better to negotiate some kind of win-win with the automakers, which have already boosted fuel economy substantially since the Obama rules went into effect. If gas prices stay cheap, consumers probably wouldn’t object to reduced MPG standards, either, judging by booming sales of low-mileage SUVs during the last few years. Trump can get what he wants without wrecking NAFTA, as long as the automakers get something, too. You can bet they’ll be asking.
Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman.
