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October 12, 2016

Memo To Trump: Blame Obama, Not Ford, For Small Car Shift To Mexico

IPI expert referenced: Merrill Matthews | In The News | Media Hit
  Investor's Business Daily

Donald Trump has been bashing Ford for deciding to shift small car production to Mexico. He's pointing the finger of blame at the wrong target. A big driver behind Ford's move is President Obama's push for tougher federal fuel mandates.  

Earlier this year, Ford (F) announced that it was building a major small-car assembly plant south of the border, and more recently said it was going to shift all its small car production to Mexico within a few years.  Trump has called it an "absolute disgrace" and says he'd hit Ford with a 35% import tax on these Mexican-built cars.  

For its part, Ford claims that there won't be any loss of jobs, since the U.S. plants making small cars will start making bigger cars. But the simple truth is that the new jobs that will come with Ford's new small-car plant won't be domestic. That's still a loss of jobs.  

Whatever you think of Ford's decision, one largely overlooked factor behind it is Obama's push for more stringent federal fuel economy standards.  

First imposed during the government-caused energy crisis of the 1970s, these "corporate average fuel economy" standards — commonly referred to by its acronym, CAFE — started at 18 miles per gallon and quickly rose to 27 mpg, where they stayed for more than a decade. Automakers are judged on the overall average fuel economy of the cars they sell in any given year.  

One of Obama's first moves as president was to force CAFE standards far higher. Passenger cars and light trucks have to get an average of 35 mpg by next year, which rises to 54 mpg by 2025.  To hit those goals, automakers must sell a lot of small cars to make up for the bigger, less fuel efficient ones. But small cars are less profitable, mainly because people don't like buying them, particularly when gasoline prices are low.  

So what's a car company to do? One easy solution is to cut production costs. "By moving their small cars to Mexico, which has skilled but cheaper labor, Ford hopes to break-even or make a little profit off them," explains the Institute for Policy Innovation's Merrill Matthews. (He notes that tax policy and climate change rules are also pushing Ford out of the U.S.)  

CAFE standards have a long and sordid history. Various studies showed that by forcing carmakers to downsize their fleet, CAFE made cars less safe and literally cost thousands of lives.  It's also well documented that tougher CAFE standards raise the cost of a new car. A Heritage Foundation analysis found that Obama's higher standards are adding roughly $3,800 to sticker prices.  

Obama's standards come up for review next year, which gives the auto industry, and politicians who have a smidgen of common sense, a chance to end this madness.  In the meantime, Trump should stop threatening Ford and direct his populist rage where it belongs — at Washington, D.C.


 

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