Why Trump's plan to tax cars built in Mexico is un-American (F, GM, FCAU)

Both Ford and General Motors have endured attacks from Trump about their operations in Mexico, where automakers from around the world have established factories to export vehicles to both the US and other markets.

Trump wants a build-it-here-sell-it-here approach because he stands to benefit from hiring and manufacturing in battleground states such as Ohio as well as in Michigan, a state he unexpectedly carried in the election. These are states he has to win in 2020 — he must make good on his promises to blue-collar workers or face blowback.

Mexico's lower labor costs and growing auto sector have made it attractive to carmakers. But it's not as if the auto industry just discovered that it's a good idea to build cars and trucks south of the US border.

Major automakers have operated plants in Mexico since the 1930s, with companies such as Ford and Volkswagen later adding factories that have been around since the 1960s. The business logic is compelling: By manufacturing vehicles in Mexico, carmakers can both serve that market and export vehicles to the US, depending on demand.

Remember the VW Bug

A classic example is the legendary VW Beetle. According to Ryan Beene and Christoph Rauwald of Bloomberg:

Beene and Rauwald noted that this level of commitment to Mexico is awful for VW's business in the event that the Trump administration implements a border tax on imports.

But there's a deeper problem, and it goes to the heart of why the US auto market is the most competitive in the world.

Americans for decades have benefitted from the highest level of choice for carbuyers of any country. The VW Beetle is representative: When it first went on sale in the US in significant numbers in the 1960s, Germany's World War II defeat was little more than a decade old. The country urgently needed to rebuild itself as a manufacturing power, and the little "people's car" fit the bill perfectly. With American roads full of huge sedans, the Beetle was a surprise hit, going on to sell millions and validating the concept of a small, affordable vehicle.

Eventually, Japanese automakers, also recovering from the war, would follow VW's lead.

American consumers benefitted immeasurably from this. For 40 years, we've been able to buy small cars, big cars, and everything in between. Relentless competition has hurt Detroit's big-three automakers, but there's no question that Ford, GM, and Fiat Chrysler Automobiles have vastly upped their game. And Mexico has played an integral role in that process, particularly since the mid-1990s.

Preserving choice

The main argument for the US carmakers that now want to send some production to Mexico is that they can't profitably produce small vehicles at their US factories, given that Americans are buying more SUVs, crossovers, and pickups. But the big three — and the so-called foreign "transplants" in the US from Germany, Japan, and South Korea — are reluctant to bail on small cars, having learned a hard lesson when gas prices spiked toward $5 a gallon less than 10 years ago.

Mexico presents them with the ideal safety valve.

Sadly for Trump, the automakers aren't going to build any additional factories or commit to major hiring in the US because the market here is running at a peak sales level. Adding additional capacity would be reckless — the factories would be idled or canceled when the sales downturn comes, and any new workers would be laid off.

Hiring in the US and building in the US just to appease the president, with the full knowledge that such actions are unstable, isn't very American. Detroit doesn't want to set up workers for a fall.

And the industry overall doesn't want to reduce the number of choices that American consumers have when it's time to buy a car. It wants to capture the customer who wants the compact sedan as well as the buyers who need a full-size pickup truck.

Consumer choice defines the US auto market. Mexico plays a critical role. So if Americans want to retain what they've come to expect when it's time to buy or lease a vehicle, they'll think twice about whether "America First" makes sense.