Following an announcement that General Motors intends to close American plants while keeping plants in Mexico and China open, President Trump took to Twitter to threaten ending subsidies given by the government to the largest automaker in the United States.
….for electric cars. General Motors made a big China bet years ago when they built plants there (and in Mexico) – don’t think that bet is going to pay off. I am here to protect America’s Workers!
— Donald J. Trump (@realDonaldTrump) November 27, 2018
What the President gets right
General Motors is making a smart business move to prepare for future downtrends in both the types of cars they manufacture and any economic failures the company or the nation may suffer in the near future. As CEO Mary Barra said, they are making the cuts to “get in front of it while the company is strong and while the economy is strong.”
This may be the case, but it’s a move that spits in the face of Americans whose tax dollars have been spent on multiple occasions over the past decade to make the company successful. It was the right business move but it dismissed the effects this would have on both the economy and job markets of the areas where the plants are located. They knew this would cause a backlash and they found that backlash to be preferable to the expensive transition that would have been required to keep the plants opened.
Logistically, it makes sense to close them. The vehicles and parts manufactured at the plants happened to be the ones on the chopping block while foreign plants are producing the more profitable items. GM would have also had to repay part or all of the incentives they received from China and Mexico that enticed them to operate there in the first place.
It would have been the fiscally wrong decision in the short run to keep all the plants open or to move production from foreign plants to domestic ones, but given the nature of the President, they should have stuck it out for at least two more years. Thinking they could kill off American jobs without repercussions from the President was a gamble and it appears they might lose.
What the President gets wrong
As I’ve made clear many times in the past, I’m not a fan of tariffs. They can be bargaining tools, but that’s it. The antiquated notion that they benefit us in the long run is dead. Tariffs are a tool of the past. They only work when there are captive audiences, and in a growing world economy there are very few who are forced to bow to anyone, even the United States.
These tariffs were the primary catalyst for GM’s decision. They may or may not acknowledge it, but the increased prices of aluminum and steel make it less practical to build cars in the United States. Tariffs may help the domestic steel and aluminum industries, but they hurt companies, like automakers, who use steel and aluminum in their products.
As for cutting subsidies, the President should not use them as retribution. If anything, he should cut them across the board.
Subsidies are used for two reasons. Some give domestic companies a leg up over foreign competition. Others are designed to steer industries towards progress, as is the case for the electric car subsidies designed to encourage consumers to buy eco-friendly vehicles.
The President has an opportunity here to cut subsidies for ALL automakers. That may not seem fair, but they’re not required and do less for consumers than most realize. Invariably they go to help the automakers themselves who are able to increase prices for cars that receive government kickbacks. It’s another broken model, similar to tariffs, that does not have the same importance they once had.
But the biggest mistake the President is making is going public with threats instead of working with GM to keep the plants open. By no means am I suggesting he should be “bribing” them with assistance, more subsidies, or another bailout. His need for the jobs to stay in America is second only to the workers’ themselves. This is a political disaster if GM starts an avalanche of plant closings in the automotive and other industries because of the tariffs.
Tax cuts are good. Tariffs are bad. Instead of punishing GM for making the smart move, he should promise to end the tariffs (behind closed doors) if GM reverses their decision. This can be spun to benefit the President if he plays his cards right.