Peter Navarro on Trump's auto tariffs: It'll be like a 'golden age gold rush' for auto companies

Key Concepts:

• Tariffs and their impact on the US auto industry
• Capacity utilization in US auto manufacturing
• National security implications of relying on foreign auto parts
• Industrial policy and unfair trade practices by foreign countries
• USMCA (United States-Mexico-Canada Agreement) and its enforcement
• American content in cars sold in the US
• Real wages and inflation
• "Arsenal of Democracy" analogy
• Tax benefits for buying American-made cars

1. The State of the US Auto Industry

• Problem: The US has transitioned from a leading auto manufacturing nation to primarily an assembly hub for foreign parts.
• Statistics:
  • The US imports half of the 16 million cars it buys annually, with very little American content.
  • Only about a quarter of the cars bought in America are actually made in America.
  • Only 19% of engines in cars sold in the US are made in America.
  • Japan and Germany account for 50% of engine and transmission production, rising to over 60% when Korea and Hungary are included.
• National Security Concern: This dependence on foreign parts raises national security concerns, as the US lacks the capacity for complete auto manufacturing.
• Capacity Utilization: The US auto industry has low capacity utilization, operating in the 60s, indicating room for increased production.

2. Causes of the Decline in US Auto Manufacturing

• Foreign Cheating: Foreign countries engage in unfair trade practices and industrial policies to gain an advantage.
• Industrial Policy: Foreign countries use industrial policy to capture the high-wage, high-profit parts of the auto manufacturing process, specifically the powertrain (engines, transmissions, and drivetrain).
• Examples:
  • Mercedes-Benz assembles cars in South Carolina, but imports engines and transmissions from Germany or Hungary.
  • Ford imports many engines from Mexico.
  • Stellantis (Fiat) imports engines from Italy and Mexico.

3. President Trump's Plan to Revitalize US Auto Manufacturing

• Goal: To bring auto manufacturing back to the US, enhancing national security and creating prosperity.
• Strategy:
  • Incentivize companies to increase American-made content in their vehicles.
  • Address cheating and lack of enforcement in trade agreements like USMCA.
  • Implement tariffs on foreign content in cars.
• USMCA Enforcement: The Trump administration argues that the USMCA was not properly enforced under the Biden administration, leading to Mexico becoming a transshipment platform.

4. Tariffs and Their Impact

• Tariff Structure: Tariffs will primarily apply to foreign content, not American content, incentivizing domestic production.
• Consumer Impact:
  • Potential for higher prices on cars with significant foreign content.
  • Offsetting factors:
    • Potential tax benefits for Americans who buy American-made cars (similar to the $7,000 EV tax credit).
    • Lower gas prices through increased domestic drilling ("drill, baby, drill").
• Productivity: Tariffs are expected to stimulate investment in US manufacturing, leading to increased productivity through the addition of machines and capital to the workforce.

5. Historical Context: The "Arsenal of Democracy"

• Analogy: The effort to revitalize US auto manufacturing is compared to the "arsenal of democracy" during World War II, where the auto industry played a crucial role in producing jeeps, tanks, and trucks.
• Significance: The goal is to restore the US's ability to manufacture essential goods for national security.

6. Addressing Concerns about Adjustment Period

• Key Question: How long will the adjustment period be, and will companies and consumers suffer during this time?
• Counterarguments:
  • The US has significant slack in its manufacturing system, with low capacity utilization, allowing for rapid increases in production without causing inflation.
  • The transition will create a "golden age gold rush" for auto companies, as those who increase American-made content will benefit from tariff exemptions.

7. Real Wages and Inflation

• Trump Administration: Real wages for middle-class and blue-collar workers increased.
• Biden Administration: Real wages plummeted due to inflation outpacing wage growth.
• Argument: The Trump administration argues that its policies will raise wages and keep inflation down by increasing productivity.

8. Conclusion

The Trump administration's plan to revitalize US auto manufacturing involves using tariffs and incentives to encourage domestic production, address unfair trade practices, and enhance national security. While there may be short-term adjustments, the administration believes that the long-term benefits of a stronger US auto industry, including increased productivity, higher wages, and greater national security, outweigh the potential costs. The success of this plan hinges on the ability of US auto companies to rapidly increase American-made content and the effectiveness of enforcing trade agreements to prevent cheating.