Ford Motor Company has abandoned plans to import its Focus Active from China. Next to the Mustang, the crossover was supposed to become Ford’s only car model sold in the United States. Ford attributes the decision to kill the Focus Active to the 25% tariff the Trump Administration slapped on imported Chinse autos and its ongoing global trade war, which also includes a broadly applied 25% tariff on steel imports and 10% tariff on aluminum imports. On the one hand, businesses often like to time the announcement of potentially upsetting news to coincide with controversial public policies, so they can deflect public outrage onto the government and vilify policies that hurt them. On the other hand, a 25% tariff probably did undermine, at least, the short-term economic viability of the Focus Active. The car industry is a business of margins and Ford has struggled for decades. Recognizing that struggle, coupled with that 25% increase in foreign-sourced steel and aluminium, Ford probably cannot profitably produce cars domestically at this time, which says a lot.
Critics of tariffs, point to Ford’s decision to kill the Focus Active as proof that Trump’s tariffs are harmful to businesses. Proponents of tariffs, however, dismiss examples like that of the Focus Active as the short-term cost of recalibrating trade policies and relationships. Both are technically correct. If someone happens to be a proponent of free trade, they will see any tariff as nothing more than an impediment to the free flow of global commerce. For critics of free trade, tariffs are necessary barriers that allow the great economic engine of the globe to function properly. In the case of the Trump tariffs, the President’s trade policies are intended to protect and foster domestic production of automobiles, steel, and aluminum. The fate of the US-bound Focus Active suggests the Trump Administration is actually engaged in counterproductive policies that are hurting US production, but there are bigger economic trends in play that go beyond the policies of the current US Administration.
For free trade proponents, US production and US sales hinge on the ability of American businesses to source globally. The costs of raw materials and the production of parts from the US is simply too great for US businesses to remain solvent and achieve profitability. By extending US supply chains into Mexico and Asia, US businesses are able to produce goods at an affordable price for consumers. Unfortunately, the extended supply chain model undermines the multitudes of domestic workers and businesses that once participated in these supply chains. Not only does this globalized economic model necessitate massive job losses and the closure of numerous manufacturing businesses, it intensifies the competition between global workers and businesses, thereby suppressing wages and profits. Without strong wages and profits, of course, US consumers cannot afford to buy the products of companies like Ford. Ford can depend on global middle class consumers, but operating around the world is far more complicated and costly.
In other words, the global extended supply chain model is both unsustainable and fails to provide for the transportation needs of those living in the US and around the world. In order to address the needs of US and global consumers, who also tend to be workers, national economies must produce a sufficient number of relatively well-paying jobs. Only once that need is fulfilled and consumers are able to earn enough to consume, global trade can be utilized to help reduce the cost of consumer goods. As the manufacturing sector is the only segment of the economy capable of producing a sufficient number of jobs that pay well-enough to sustain a Middle Class in the US, the US government needs to adopt policies that promote the development and sustainability of US manufacturing. Regrettably, US manufacturing has been allowed to collapse in the face of intense global competition and rising costs. Like any economic correction, however, correcting the decline of US manufacturing comes at a steep price. Examples such as that of the Focus Active, which Ford was expected to sell around a paltry 50,000 of the Chinese made crossovers, truly represent the kind of causalities expected from any attempt to rebalance US trade relations.
That said, one must look at trends to understand economics. The Trump tariffs may have killed the Focus Active in the short-term, but the economics of Ford’s production, as well as other car companies, are headed in the wrong direction. Costs rise with economic growth, which is why income inequality is a critical issue for average workers and businesses, while global competition compels businesses to cut costs. Not only has Ford been priced out of its own domestic car market, rising costs and shrinking profits will eventually force it to scale-down domestic production and become a speciality business that caters to a narrowing segment of US consumers. Someday, Ford will not be able to produce any vehicles domestically. The most troubling part is that Ford is just an example of an economic trend. That trend can, of course, be blunted. While there is plenty of room to criticize the Trump Administration’s approach to recalibrating US trade relations, policymakers in the US and abroad need to proactively confront the need to ensure economic opportunity at home through domestic production instead of succumbing to the allure of growth through increased consumption and cheap goods.
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