By Matthew Radman,
International Business Assistant Editor
BMW (XE: BMW), Mercedes-Benz parent Daimler (XE: DAI) and Volkswagen (XE: VOW) are the most recent automakers targeted as part of President-elect Donald Trump’s initiative for increased domestic manufacturing. In a Monday interview with Bild, a German newspaper, Trump forewarned the German carmaker, “If you want to build cars in the world, then I wish you all the best.
You can build cars for the United States, but for every car that comes to the USA, you will pay 35 percent tax.” His statements came just weeks after Ford (NYSE: F) canceled its plans for a $1.6 billion dollar Mexican manufacturing plant in the wake of another Trump tweet directed at the American car maker.
Toyota (NYSE: TM) also found itself fin Trump’s crosshairs with its proposed Mexican plant. However, they have not yet taken action to change course.
Trump has not softened his stance about bringing manufacturing back to the United States. With this threat against the German automotive giants, a clearer picture is beginning to form of what policies may be to come.
Trump’s proposed tariff would tax cars manufactured in other countries and sold in the US market. The logic of the policy is to disincentivize companies from importing foreign made cars by erasing the manufacturing savings achieved by overseas production.
The tax would result in the US becoming a much more attractive place to manufacture for companies who heavily invest in the US car market; a market that consumes over 7 million vehicles a year.
While the importance of the US market does give Trump bargaining power, his policies bring a fair amount of controversy.
Issues in raising the cost of imported cars are that it does not address that it would increase the manufacturing expenses of any cars not already produces in the US.
If a company decides to pay the tax, its expenses become greater. If a company builds a plant in the US to avoid the tax, it still ends up costing more than it would have to manufacture internationally.
This lose-lose situation would ultimately culminate in higher prices for consumers and or lower profits for companies.
Automakers are not the only entities feeling the heat of the tariff; the GOP is in talks with Trump about pivoting his plans towards an alternative border adjustment tax as outlined in its “A Better Way” blueprint. Many large countries already implement this type of tax.
The primary function of this kind of tax would be levied on imports and not on exports, incentivizing US manufacturing and creating a more leveled playing field for the US to compete on the world stage regarding manufacturing, as the GOP claims.
While it is too early to know which taxation system will be implemented, the debate over import and export taxation gives a valuable glimpse into the changes likely to come to the US tax system under President Trump.
In the coming months and years, a solution such as the one proposed by Trump, the GOP, or another system altogether will aim at helping The United States become the manufacturing force that it used to be.
A version of this article appeared in the Tuesday, January 24th print edition.
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