After January 20th, two things are certain: Donald Trump is the President and Detroit is experiencing a robust comeback after filing for municipal bankruptcy four years ago. Donald Trump has promised to renegotiate trade deals and lower the corporate tax rate. If Trump can make good on his promises, how will these changes impact the path to recovery that Detroit is currently on?
Generally speaking, there are pros and cons to imposing tariffs on imports. One the one hand, tariffs will allow the government to collect more revenue and allow domestic industries to benefit because of the reduction in competition that a tariff brings.1 On the other hand, this means higher prices for producers which leads to higher prices for consumers. 2 In the long run, “businesses may see a decline in efficiency due to a lack of competition, and may also see a reduction in profits due to the emergence of substitutes for their products.”3
Trump’s plans to renegotiate or do away with some trade deals, such as NAFTA, could have major implications for the auto industry and in turn the motor city. Trump has said that he plans to renegotiate NAFTA to make it more favorable for American workers.4 Trump has taken it a step further, however, by saying that he would have a 10 to 35 percent tariff on vehicles and parts that are made in Mexico and subsequently imported into the United States.5
Getting rid of NAFTA and imposing a tariff on imports could pose problems for the economy of the United States and the Detroit area. The basic law of supply and demand tells us that as prices increase, demand for those products will decrease. 6
Durable goods, like cars, have been an important part of the recovery after the Great Recession and the competitiveness of the United States auto industry is highly dependent on free trade generally. 7 In fact, 37% of the United States’ imports of auto parts came from Mexico and Canada in the year 2015, which is a source of good paying jobs in the United States. 8 Even more important, United States parts manufacturers “sent 61% of their exports to Mexico and Canada in 2015.” 9 While Trump has claimed that NAFTA and free trade have killed jobs in recent years, the synergy has helped make the automotive industry more attractive and has helped create 264,800 new jobs in the United States auto industry between January 2010 and June 2016, which is a 40% increase in employment.10
Michigan’s economy, especially the Metro Detroit area economy, has a cyclical nature to it. 11 This is driven by the auto industry; when the industry was experiencing a boom, the state had low unemployment rates, but as auto sales declined and the industry’s growth slowed or declined, the unemployment rate would begin to rise. 12 Trump’s stance on free trade and the threat of tariffs doesn’t bode well for the Detroit area economy, which came in first place nationally for the number of advanced automotive jobs at 67,825 in 2015. 13 Michigan’s economic sensitivity to changes in the auto industry, especially a sudden change that tariffs could bring, would be problematic for the state and Detroit as both are recovering from the Great Recession.
While Trump’s stance on free trade may be problematic for the auto industry and Detroit, his pledge to lower the corporate tax rate from 35% to 15% could help a growing Detroit. The Tax Policy Center’s analysis of Trump’s tax plan states that Trump’s tax plan would reduce the incentive for companies to recharacterize their domestic income as foreign income and also reduce the incentives for corporate inversions.14 If these incentives pan out, the goal would be that companies would use the savings and invest here in America. This puts Detroit in a unique position. Detroit has recently seen many companies move to the city and an increase in investment by large corporations, such as Quicken Loans. Also, Detroit is at a moment where it has high occupancy rates in commercial real estate and low cost of commercial leases compared to other major cities. Along with both of these facts, Detroit is growing to be a more vibrant city and downtown area. All of these factors taken together have helped drive an increase in investment in the city and if Trump’s tax plan and goals pan out, it could spur further development and investment in Detroit.
The analysis does not end here however. The effect of these two policy changes, should they happen at relatively the same time, creates another unique situation for Detroit. If tariffs are placed on auto imports, causing prices to increase, demand to fall, and an overall negative impact on the area’s economy and employment situation, this could make Detroit a less ideal place to invest in. Also, this problem may be worsened by the notion that some corporations may not use the tax savings from Trump’s plan to invest it in America. Goldman Sachs has predicted that a reduction of the tax rate to 15% from 35% could lead to a “30% surge in buybacks by the S&P 500 companies.” 15 Should these two events happen, Detroit may see its economic growth slow down or come to a halt, depending on the impact the auto industry would face. At this moment, however, it may be best to take a “wait and see” approach.
Brent Radcliffe, The Basics of Tariffs and Trade Barriers, INVESTOPEDIA, http://www.investopedia.com/articles/economics /08/tariff-trade- barrierbasics.asp#ixzz4QW2tsy7d. ↩
Tim Hains, Donald Trump’s Seven-Point Plan To Reform NAFTA And Stop WTO “Cheaters”, REAL CLEAR POLITICS, June 28, 2016, http://www.realclearpolitics.com/video/2016/06/28/donald_trumps_seven-point_plan_to_reform_nafta_and_wto_cheaters.html. ↩
Michael Wayland, Melissa Burden & Keith Laing, Trump Presidency Drives Uncertainty into Auto Industry, THE DETROIT NEWS (Nov. 10, 2016), http://www.detroitnews.com/story/business/autos/2016/11/09/automakers-trump/93537072/. ↩
Reem Heakal, Economic Basics: Supply and Demand, INVESTOPEDIA, http://www.investopedia.com/university/economics/economics3. asp. ↩
Mary Anastasia O’Grady, Trump’s Nafta Mistakes Are Huge, WALL ST. J., Oct. 3, 2016. ↩
Martin Lavelle, How Tight is Michigan’s Labor Market?, FED. RES. BANK OF CHICAGO (Oct. 11, 2016), http://michiganeconomy.chicagofedblogs.org/?cat=3. ↩
Tom Henderson, Metro Detroit Ranked No. 1 Nationally in Engineering Auto Jobs, CRAIN’S DETROIT BUS. (Feb. 12, 2015). http://www.crainsdetroit.com/article/20150212/NEWS/150219949/metro-detroit-ranks-no-1-nationally-in-engineering-auto-jobs. ↩
Jim Nunns, Len Burman, Jeff Rohaly & Joe Rosenberg, AN ANALYSIS OF DONALD TRUMP’S TAX PLAN 5 (Tax Policy Ctr. ed., 2015). ↩
Linette Lopez, Trump Wants to Hand Corporate America A Sweet Tax Deal—But it Doesn’t Look Like CEOs Will Share the Wealth, BUSINESS INSIDER, Nov. 22, 2016, http://www.businessinsider.com/ trump-tax-reform-could-lead-to-more-buybacks-not-pro-growth-spending-2016-11. ↩