On August 8th, Donald Trump revealed a new economic plan after consultation with his new economic policy team, offering insight into how his advisors and their policies would impact the U.S. economy. Taken in the context of his past public statements, his economic plan would be very problematic for multiple U.S. industries, including the very automakers whose employees he was addressing on August 8.
Donald Trump has repeatedly railed against trade agreements, such as NAFTA, that he believes responsible for job losses in American manufacturing over the last two decades. In his speech in Detroit on August 8th, he said:
According to the Bureau of Labor Statistics, before NAFTA went into effect, there were 285,000 auto workers in Michigan. Today, that number is only 160,000.
Later, he indicated that:
At the center of my plan is trade enforcement with China. This alone could return millions of jobs into our economy.
Whether for political gain, or a fundamental lack of understanding as to how the manufacturing economy has evolved since 1994, this statement mis-attributes the loss in manufacturing jobs to free trade rather than automation and technology. Forbes' account of the extraordinary turnaround at Hostess Brands exemplifies how automation-driven productivity improvements can reduce the demand for labor in manufacturing:
Moreover, the new business plan called for the same output using a fraction of the labor. The old Hostess dessert division required 9,000 employees and 14 factories to pump out just under $1 billion worth of cakes a year. The new plan called for 1,000 people and five plants (that number was soon cut to three as one was sold, another shuttered).
As the New York Times pointed out in April 2016:
In America's factories, jobs are inevitably disappearing, too. But despite the political rhetoric, the problem is not mainly globalization. Manufacturing jobs are on the decline in factories around the world.
Rather than "bringing back" American jobs, a trade war with China under Trump would likely exacerbate American job losses. Even the conservative Wall Street Journal ran an opinion article by Richard Katz, which contemplated the effects of a trade war with China:
Mr. Trump may not think this matters. But consider how U.S. stocks swooned in 2015 in reaction to a relatively mild deceleration in China. How much more severe would the impact be on currency and stock markets from the economic and geopolitical maelstrom Mr. Trump proposes to let loose-not to mention the anxiety of having such a reckless character at the helm in Washington.
The consequences for specific companies could be severe. In December 2015, U.S. aircraft manufacturer Boeing (NYSE:BA) received a $10 billion order from China Southern Airlines (OTCPK:CHKIF). As recently as this month, it was announced that Detroit automakers Ford (NYSE:F) and General Motors (NYSE:GM) set China sales records, offsetting stalling U.S. demand. The article also notes that China is the world's largest auto market. It is curious how this recent news did not make it into Trump's Detroit speech. Perhaps he did not want the automakers that he was addressing to realize that a trade war with China could very well cost them their jobs.
Meanwhile, the auto industry is facing two large, separate, disruptions simultaneously. While it is likely to benefit in the medium term, as the long-anticipated availability of self-driving cars accelerates the replacement cycle, car sharing services (from Zipcar to Uber), which increase car utilization rates, may limit the total number of vehicles that are needed to serve global demand.
Given the industry cyclicality, political uncertainty, and the risk of technological disruption, I am steering clear of auto industry stocks for now.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.