Trump's Tariffs Cause Chaos in Auto Industry

0:04My name is Thomas Koval. I am the CEO of Leggera Technologies. I live in Rochester, Michigan, not far from Detroit, the center of automotive industry. Thomas's company makes parts for vehicles, things like the shelves inside Amazon vans and those spare tire holders at the back of Jeeps and Ford Broncos. How long have you worked in the automotive industry? I've actually worked in automotive industry my entire life, since I was 16 years old. I started working in factories in Germany, and I'm originally from Sweden. I'm a big fan of Detroit, and I'm a big fan of the auto industry. How much of your production is in the U.S., and how much is outside of the U.S.?

0:56All our production is in the U.S. However, we do have material coming in from other countries. We have material coming from Mexico. As of today, those materials will be subject to a new 25 percent tariff. Tariffs, 25 percent on Canada and 25 percent on Mexico, and that'll start. So they're going to have to have a tariff. So what they have to do is build their car plants, frankly, and other things in the United States. President Trump has said these tariffs are necessary to fight fentanyl trafficking and illegal migration, as well as to build up U.S. manufacturing. It's a very unpredictable time right now, and it's a very, very tough time.

1:47We don't know where these tariffs are going to go, so we're going to have to deal with that. But the question is, how long will that last for? So a company like ours, we built up inventory to try to see if this is only going to last for two weeks, we're going to be fine. But after that, what happens?

2:09If you could use one word to, like, describe the conversations that are going on in the auto industry right now, what would it be? Instability. Not panic or... But there's probably a lot of panic at the moment as well. But now that it's real, I'm sure that there is, there's definitely some panic as well. Welcome to The Journal, our show about money, business, and power. I'm Kate Leinbaugh. It's Tuesday, March 4th.

2:52Coming up on the show, the trade war is here, and it's causing chaos for carmakers.

3:15And what's the one word you would use to describe how the auto industry is feeling today? A bit chaotic. Sorry, that's three words. Chaotic. But I think it's pretty representative. That's our colleague Mike Kalias. He covers the auto industry and is reporting on how Trump's tariffs are going to affect car makers. And I think that has people freaked because there was this idea that this was a negotiating tactic. This is never really going to happen. I mean, tariffs on Canada and Mexico for the auto industry, you know, that's like DEFCON 1, right? This could wipe out profits for companies big and small.

3:53So, yeah, people are freaked today. How will these tariffs impact the U.S. auto industry? I mean, there is no industry that has more at stake than automotive. Of all of the trade that happens between Canada and Mexico, the car business accounts for nearly a quarter of that. About 23 percent of cars that are sold in the U.S. are built in either Canada or Mexico. Half of the car parts that come into the country that are imported here to be put into cars, about half of that comes from either side of the border. That's$100 billion of stuff. And then beyond the car companies, you know, there are thousands of parts suppliers.

4:40When we talk about an American-made car, what does that mean in reality? Well, I think most people think of it as cars that are assembled inside of the U.S. And, you know, most of the cars that get sold in the U.S. are built here. It's a small majority. But a lot of those cars, the guts of the car is imported. A lot of it from Mexico, a lot of it from Canada. So it can be U.S. built, U.S. made, but, you know, a lot of it's relying on foreign parts. The auto industry's supply chain was shaped by the North American Free Trade Agreement. NAFTA took effect in 1994 and created a free trade zone between the U.S., Canada, and Mexico.

5:30Here's President Bill Clinton at the time. NAFTA will tear down trade barriers between our three nations. It will create the world's largest trade zone and create 200 ,000 jobs in this country by 1995 alone. President Trump, in his first term, began renegotiating NAFTA. And that deal, known as USMCA, was finalized in 2020. The renegotiation that Trump did in his first term of NAFTA that produced what we call the USMCA now, I mean, it was really, you know, there were some incremental changes. It required some costs and some investment, and companies had to make more stuff in North America in order to bypass any tariffs.

6:13But it was, you know, one executive referred to it as a rebranding, right? I think auto executives went into this feeling like cooler heads were going to prevail in a way. Under both deals, there were no tariffs imposed on car parts and materials. And so car manufacturing continued to move regularly across the borders with Mexico and Canada. So now the auto supply chain includes thousands of companies sending parts back and forth across borders multiple times. Our colleagues at The Wall Street Journal did a very nice analysis just the other day about how it followed one part, a piston, a pretty basic component that crossed the border six times before it got into a car, right?

7:03It was raw aluminum in Michigan, and then it was shipped to Canada to make into a basic part, and then, you know, back to Michigan for machining, and then down to Mexico to be, like, finished. And then it went to Wisconsin at one point, and then, you know, back to Michigan to be put in an engine. So, like, we don't know exactly if in a case like that, and that's sort of the norm in the industry. We don't know if that's going to get hit every single time. But that's part of the sort of the freak out, right, is people don't know. And they've got to assume the worst at this point. When Trump started floating the idea of 25 percent tariffs on Mexico and Canada, how did the automakers react?

7:45I think on the tariff piece, you know, they felt like they've seen some of the rhetoric and bluster kind of become more manageable once it's put into policy. But then as soon as, you know, a week or two after the inauguration, he announced a 25 percent tariff on Mexico and Canada. I mean, that was just kind of worst case scenario. I mean, he wasn't talking about redoing that trade pact. I mean, he was was almost as if he was acting like it didn't exist. And so I think plans became a little more urgent then because it was so extreme. And did auto executives try to negotiate with the Trump administration?

8:22Yes, there's been an intense lobbying effort going on. You know, one big point they've made is like, look, you know, you can do this and it's going to hurt everybody in the industry, you know, GM and Ford and Nissan and Honda. But it's going to hurt the U.S. companies more because they have a more extensive footprint in North America. And there are imported cars coming from Japan and Korea virtually tariff free. And so this is going to create an unlevel playing field. It's going to help our competitors and it's going to hurt us. But I think the bottom line point that they've really been trying to make to the administration is like this is going to have the opposite effect of what you think.

9:03Like, this is going to hurt our ability to invest in factories and create U.S. manufacturing jobs.

9:12Now that the tariffs are in place, what's the auto industry going to do? That's next.

9:36When Thomas Koval, CEO of Leggera Technologies, first heard tariffs might be coming, he tried to come up with a lot of solutions. As soon as we heard he was going to do the tariffs, we kind of went into a little bit of a war room scenario where we were planning out inventory levels. Can we do bonded warehousing? What are some of the solutions? Because ultimately, we don't want to impact the customer. But the reality is that when we look at it now, we're going to have to have some serious discussions with our customers about this. This is a pretty significant price increase. So you anticipate passing along these tariffs to your customers, Ford or Jeep or whoever, and then they will pass it along to the consumer?

10:32Yes. That'll happen. We will try to do whatever we can to mitigate that. Are you considering moving your supply chain into the U.S.? We are looking at all solutions that work best for ourselves and for the customer and for the supplier. And I know that sounds like a very political answer, but that's the truth. them. It's not so easy. So the truth is, say we wanted to work with our supplier and bring them back up to the United States. It's one thing to find the shop floor space and actually build a bank and move the lines. But you also have to do something called a PPAP. You have to make sure that the product that's coming out of the new plant has been tested and verified.

11:23Cars are, of course, a safety product. So they go through rigorous testing and this takes time. Yeah. What does that mean? Build a bank of material? Yes. So you eat 10 cookies a day. So I produce 10 cookies a day. But now I'm going to have to shut down production because I'm going to move my lines to the United States for 10 days. So I have to build up on Saturdays and Sundays, which is overtime and cost money. I'm going to have to build up 100 cookies, preferably 130, because who knows, something might go wrong through the process. So I have to build up a bank of cookies until I start production back up again in the US.

12:13How much would it cost to do that? Wow, that's a good question. It all depends. If you're able to build a bank, then potentially you can just spend about, I don't know,$500 ,000 to$1 million to bank that material and move it up. But if you have to buy new tools and new equipment, depending on whatever commodity that you're in, it could be somewhere from$100 ,000 to, I don't know,$10 million, something like that. So lots of money. Do you understand the rationale behind the tariffs? I do understand the rationale behind the tariffs. And I really do believe in U.S. manufacturing. And I want to bring more business here.

13:01I just wish there was two ways that it was done a little bit differently. One, a longer and better timeline to prepare. And I would say also from the standpoint of it is quite punitive instead of, say, motivating. And whether you want to use carrot or stick, I guess it's my nature. I like to use carrot. I feel this is more of a stick scenario. And given the world that we're in, what is the thing you would ask for? Would you ask for just pledge to keep these tariffs in place so there's certainty and you can work around it or for them to go away? So if I could ask Mr. Trump one thing, I would ask for more stability for the auto industry.

13:50So I understand the tariffs. Just wish that it could be, say, more of a motivating standpoint, more of this carrot versus stick scenario and allow for a little bit more time. I want to see toolmakers, die makers, machine builders, more manufacturing in the United States. I think it'll make us stronger. So if I could ask for something, it would be a bit more time and a clear plan and hopefully some type of agreement between the Democrats and Republicans of how do we want to handle industry in the United States. But that's, I think, is maybe too much to ask for. So how are you feeling right now?

14:32I'm feeling uncertain. But the one thing that I will say is with automotive, with manufacturing, with Detroit, very, very gritty, hardworking people. We've been through this before. I think hit from left to right for the last couple of years and we've been able to survive. I know that we will survive. I'm very positive. But instead of being able to focus on developing and making our business more efficient with cool technology such as AI and machine learning and spending our money towards that, the industry is absorbing that money into dealing with having to hold more inventory and moving lines and things like that.

15:17So that's the sad part about it.

15:24Trump's tariffs have ignited a trade war. Overnight, China announced new tariffs after Trump added another 10 % levy on Chinese goods. Mexico's president said she planned to retaliate, and Canada said it would impose 25 % tariffs on nearly$100 billion worth of U.S. imports. Trump then warned Canada that he could raise his tariffs even further. Economists have told our colleague Mike Kalias that American consumers will bear the brunt of this trade war.

16:03I think that's generally the expectation. I mean, it's going to get passed on to the consumers. And, you know, you see a lot of different estimates. But I think the sort of sturdiest ones I've seen is if a car costs right now mid$40 ,000 is kind of the average that an American pays for a car, it's going to tack on 7, 8 % in inflation to that. So that's a$3 ,000 or more hit. And there are estimates that are much more than that for larger cars. So, yeah, I think the expectation is going to be borne by the consumer. So we've moved from the era of North American cooperation to a full-scale trade war.

16:43It sure feels like that. And it comes at a time where there's already an affordability problem in the industry. I mean, cars are something like 30 percent more expensive. People are paying 30 percent more for cars today than they were, you know, just before the pandemic. That's going to exacerbate a problem that is already tough on a lot of American consumers and car dealers and companies.

17:16Before we go, we're interested in hearing from you. Do you have any questions about what's happening with the Trump administration? About Trump's speech to Congress or the war in Ukraine or tariffs? Email us and let us know. Please send us a voice note to thejournal at wsj.com. That's thejournal at wsj.com. That's all for today, Tuesday, March 4th. The Journal is a co-production of Spotify and The Wall Street Journal. Additional reporting in this episode by Christopher Otts.

17:55Thanks for listening. See you tomorrow.