Motor City Blogman

The Art of Trump’s CAFE Deal is Fraught with Roadblocks on Both Sides of the Street

Executive Order Rescinds Obama’s 2025 CAFE Standard

President Trump applied the Art of the Deal to the American auto industry Wednesday by cancelling an “eleventh-hour executive order” by the Obama administration that would have locked in 2025 Corporate Average Fuel Economy standards of 54.5 mpg. Instead, the Trump administration will allow the ‘mid-term review’ originally scheduled for April 2018 to determine whether the standards, to which automakers agreed early in the Obama administration, would negatively affect employment numbers in the business. In exchange, Trump expects automakers to open new factories and create new jobs in the U.S.

“The era of economic surrender by the United States is over,” Trump said before announcing he would tear up Obama’s executive order on the 2025 CAFE regulations. “It’s over.”

Trump repeated his belief that the North American Free Trade Agreement (NAFTA), signed in 1994, and the Trans-Pacific Partnership (TPP), from which he had already had pulled out, are disasters, citing “foreign cheating” and currency manipulation.

The president took credit for Ford Motor Company’s January cancellation of its $1.6-billion small car plant in Hermosillo, Mexico, FiatChrysler’s announcement of 2,000 new jobs in Michigan and Ohio, including moving Ram HD production from Mexico to Metro Detroit, and, “breaking news,” General Motors’ strategically timed announcement late Tuesday night of “900 new or retained jobs in Michigan in the next 12 months.”

Trump announced the CAFE rollback in the “Arsenal of Democracy,” the World War II B-24 bomber plant in Ypsilanti, Michigan that us now home to the American Center for Mobility, an autonomous car-testing facility still under construction. Joining Trump were GM CEO Mary Barra, Ford Motor Company CEO Mark Fields, and FiatChrysler CEO Sergio Marchionne. United Auto Worker President Dennis Williams – not a Trump supporter last November – and Transportation Secretary Elaine Chao also joined the president onstage before a crowd of about 1,000 UAW workers.

Trump also reportedly met with top-level executives from the foreign automakers that build cars in the U.S. That group includes Toyota, Nissan, Honda, Subaru, Mercedes-Benz, BMW, Volkswagen, Hyundai, and Kia.

“Today, I am announcing we’re going to cancel that executive action,” Trump said of Obama’s rejection of the mid-term review built into his original CAFE standard. Trump promised regulatory relief for the industry.

“We must embrace a new economic model. Let’s call it The American Model.”

In return, “auto companies have to hire and grow in our country.” He called on automakers to grow jobs and build or expand factories in the U.S. as a sort of quid pro quo for the mid-term review.

Problem is, Trump’s promise to keep automotive jobs in the U.S. will be as tough to keep as his similar promise to coal miners. The difference between these two industries is that while coal is losing market share to natural gas, the auto industry is coming off of two straight record years in the U.S. The 2015 and ’16 calendar years each rounded out to roughly 17.5 million cars and light trucks.

If historical cycles are any trend, we’re not going to see a new record for more than a few years. We could try to export more vehicles to the European Union, but unlike the U.S., the EU is rife with overcapacity. In the United States, automakers, both foreign and domestic, rationalized their capacity in the wake of the Great Recession and accompanying GM and Chrysler bankruptcies. They don’t need to build any new factories in any country. Ford Motor Company didn’t need to build the Hermosillo plant it canceled two months ago – timing of its cancellation was as fortuitous as GM’s announcement last night it would save 900 jobs.

Mexico and Canada both have more overcapacity than the U.S., which is running fairly lean these days. Of course, automakers want to respond if demand starts to rise again, but except for a stock market rally, the nascent Trump administration has yet to prove it can build automotive demand much past 17.5 million. Automakers do have a capacity problem, but it’s not a matter of having too much or too little in the U.S. Rather, it’s a matter of having too much car capacity and too little truck and SUV capacity.

Rolling back 2025 CAFE standards will exacerbate the need for a shift in capacity from cars to trucks, but that’s okay. The smaller, car-based SUVs that get EPA fuel mileage almost equal to their sedan counterparts are the models that tend to be in short supply – consider how GM, FiatChrysler, and even Ford have to keep increasing incentives in order to keep moving their big pickup trucks.

As for the CAFE dead-end, there’s no question automakers are happy for relief from the 2025 standard. The mid-term review covers the standard for the years 2022 to ’25, ending at 54.5-mpg, and you can bet that the powertrains major automakers already have in the pipeline for the early ‘20s are designed to meet those standards. If GM, Ford, FiatChrysler, or any of the foreign automakers assembling vehicles in the U.S. have any plans to increase imports to the EU, they’ll need to meet stiffer emissions standards, anyway. The mid-term review essentially gives automakers the leeway they need to sell a higher mix of big SUVs and pickups.

President Trump has not yet hinted at what he might do about the California Mandate, which allows that state to set a higher standard than federal rules. California and 16 mostly populous Section 177-adherent states make up a huge portion of our automotive market and the California Air Resources Board’s Zero Emissions Mandate is almost single-handedly responsible for everything from the GM EV-1 and Chevrolet Bolt to the Tesla Motors model line.

In Ypsilanti, Trump promised a “big announcement” next week that will further help boost autoworker employment. This has a lot of environmental and consumer groups worried that Trump will attempt to dismantle the California Mandate, and suddenly, ironically, make higher emissions standards and the ZEV mandate a States Rights issue.