Ellen Hughes-Cromwick, former chief economist at Ford and the U.S. Department of Commerce, brings her extensive knowledge of the auto industry to the table. She discusses how proposed tariffs could disrupt the intricate supply chains of North America's auto manufacturers. Ellen also explains the challenges these tariffs pose for the transition to electric vehicles and highlights the economic ramifications for consumers. The conversation delves into the relationship between protectionist policies and the growth of the electric vehicle market.
The North American auto industry's reliance on cross-border trade makes it susceptible to disruptions from proposed tariffs on imports.
Imposing tariffs could paradoxically increase vehicle prices, reducing consumer demand and potentially leading to job losses in the manufacturing sector.
Despite benefits for U.S. EV production, uncertainties from tariffs may hinder the acceleration of electric vehicle adoption by complicating supply chains and pricing.
Deep dives
Impact of Tariffs on the Auto Industry
The proposed tariffs on imports from Canada and Mexico pose a significant threat to the North American auto industry, which heavily relies on cross-border trade for parts and assembly. A potential 25% tariff would drastically alter the cost structures for automakers, as components are often sent back and forth across borders multiple times before final assembly. This disruption could lead to increased operational costs, forcing suppliers with already thin margins to shut down, thereby affecting job levels in both manufacturing and supporting sectors. The ripple effects might not only impact the auto industry but could also hinder the acceleration towards electric vehicle (EV) adoption.
Supplier Networks and Manufacturing Complexity
The complexity of the auto industry's supply chain means that vehicles today are assembled from parts sourced from various countries, with intricate relationships between suppliers. Manufacturers like Ford optimize their supply chains to maintain competitive pricing, but tariffs present a challenge as those previously established networks could become inoperable due to increased costs. For instance, a vehicle may contain components sourced from both U.S. and foreign suppliers, making it difficult to quickly adjust sourcing strategies in the face of tariffs. Consequently, manufacturers may have to reevaluate and restructure their supplier contracts, which can be a time-consuming process given the fixed nature of capital investments in production facilities.
The Long-term Effects of Tariffs on Employment
While the imposition of tariffs might suggest a boon for U.S. manufacturing workers by potentially returning production jobs from abroad, the reality is more complicated. Tariffs are likely to lead to higher vehicle prices, resulting in weaker consumer demand and, consequently, lower production levels, which could ultimately eliminate jobs. Additionally, the automotive labor market is not as mobile as one might expect, as many workers are entrenched in specific regional economies that could suffer from reduced supplier demand or factory closures. This balance between potential job creation and reduction underscores the complex economic dynamics at play, driven by tariff policies.
Electric Vehicle Development and Supply Chain
The transition to electric vehicles (EVs) may face challenges amid the threat of tariffs, as manufacturers assess their supply chains and production capacities. Although EV production benefits from a more established supply chain within the U.S., uncertainties introduced by tariffs could slow down developments and impact pricing. EV manufacturers must navigate the complexities of sourcing components domestically while also competing with possibly inflated pricing from other automakers. However, there is potential that tariffs will accelerate the shift toward EVs as manufacturers endeavor to create a more localized supply chain to avoid future tariff shocks.
Future Economic and Market Considerations
Long-term evaluations suggest that fixed capital commitments coupled with tariffs may lead to greater instability in automotive production and pricing. As companies face heightened production costs, price inflation for vehicles and automotive parts could soar, negatively affecting consumer purchasing power and overall market demand. This inflationary effect extends beyond vehicle purchases, complicating broader economic dynamics by potentially squeezing disposable incomes for many households. With ongoing uncertainties regarding policy stability and market regulations, companies are left grappling with the risk of economic downturns while navigating strategic decisions for current and future auto manufacturing processes.
Over the past 30 years, the U.S. automaking industry has transformed how it builds cars and trucks, constructing a continent-sized network of factories, machine shops, and warehouses that some call “Factory North America.” President Trump’s threatened tariffs on Canadian and Mexican imports will disrupt and transform those supply chains. What will that mean for the automaking industry and the transition to EVs?
Ellen Hughes-Cromwick is the former chief economist at Ford Motor Company, where she worked from 1996 to 2014, as well as the former chief economist at the U.S. Department of Commerce. She is now a senior visiting fellow at Third Way and a senior advisor at MacroPolicy Perspective LLC.
On this week’s episode of Shift Key, Rob and Jesse chat with Ellen about how automakers build cars today, why this system isn’t built for trade barriers, and whether Trump’s tariffs could counterintuitively help electric vehicles. Shift Key is hosted by Jesse Jenkins, a professor of energy systems engineering at Princeton University, and Robinson Meyer, Heatmap’s executive editor.
Download Heatmap Labs and Hydrostor’s free report to discover the crucial role of long duration energy storage in ensuring a reliable, clean future and stable grid. Learn more about Hydrostor here.
