Investing in the Auto Industry: People Want Cheap Cars

Our reality TV star president seems to believe that his roulette wheel tariffs (spin the wheel, find out today’s tariffs) will somehow lead to a boom in manufacturing in the United States. While that may make for good reality TV, it is a horrible way to promote an industry.

The basic story, for anyone at all familiar with business, is that companies need some predictability in order to plan for the future. They are looking to build factories and make other investments that will be repaid over the next 10 or 20 years, or even longer. If they have no idea what sort of trade barriers will exist even 10 months down the road, it makes it very difficult to make long-term investments.

Before highlighting further the problem with Donald Trump’s strategy, it is worth again calling attention to the Biden administration’s incredible success in promoting manufacturing. While the media worked hard to ensure that no one knew about it before the election, there was an unprecedented boom in the construction of new factories under Biden.

Real (inflation-adjusted) spending on factory construction exploded under Biden due his infrastructure bill, the CHIPS Act, and the Inflation Reduction Act. In 2024 it was more than twice as high as it had been in 2019.

Interestingly, factory construction actually fell under Trump in his first term, even before Covid. In 2019 it was more than 10 percent below the levels hit in 2016.

But Trump’s failure in his first term doesn’t guarantee failure in this area in his second term. His policies do.

In addition to the uncertainty created by Trump’s ever changing tariff rates, there is also the problem that many of his tariffs are making inputs into manufacturing more expensive. More than half of the goods we import are inputs into manufacturing, either parts or raw materials. When Trump raises tariffs on these inputs, he is making it harder to manufacture in the United States.

Trump’s tariffs on steel and aluminum stand out in this respect. He decided to raise these from 25 percent to 50 percent, apparently because he wanted a good laugh line at a speech to steelworkers in the swing state of Pennsylvania. No one eats steel and aluminum. They are inputs for other manufacturers, like automakers. Apparently, Trump didn’t realize that he was making it considerably more expensive to manufacture cars in the United States with his tariff du jour.

But apart from the uncertainty created by Trump’s random tariff policy, there is also the certainty that the rest of the world is rapidly moving forward in building better and cheaper cars, and specifically electric vehicles (EV). China is already producing high quality EVs that sell for less than $10,000 in China.

And the direction is clearly downward. It is virtually certain that these cars will cost less and perform better in five years than they do today. This means not only will they drive better, they will have far longer ranges and shorter recharging times. It’s very likely that in five years, the average EV being sold in the world outside of the United States will drive longer on a single charge than the average U.S. car travels on a tank of gas and it will charge in less time than it takes to fill a tank of gas.

That’s the reality facing U.S. automakers in considering whether to build new factories or expand capacity to produce the gas-powered cars favored by Donald Trump. He personally might be fine with forcing people in the United States to pay more for inferior cars. But it is likely that a promise to let Americans buy foreign cars that cost one-third to half as much as U.S. made cars, and cost half as much to fuel and operate, will be a very appealing platform for future candidates for president and Congress.

This means that Donald Trump’s protectionism for U.S. auto manufacturers is likely to be very short-lived. That may not be clear to our reality TV star president, but the executives making investment decisions in the auto industry understand this story. As a result, don’t look for a boom in factory construction in the auto sector, although we can be absolutely certain that we can look forward to Donald Trump celebrating the success of his policy.