Blame for Ford’s Mexico move falls on Obama Administration

But it is the CAFE standards, not the labor cost differential, that are driving the move to Mexico

slpFord Motor Company made headlines on Wednesday, September 9, when, during an investor conference, CEO Mark Fields told attendees that it will invest $1.6 billion building a manufacturing plant in San Luis Potosi, Mexico, and will move all of its small car production there during the next two to three years.

The announcement was hardly news as Ford has been talking about the shift for more than a year. But in the throes of an election that has both candidates decrying companies that send jobs to low-wage countries, the decision was an invitation for attention.

The next day, during a speech in Flint, MI, Donald Trump declared autotrumpthat it was: “horrible.” He’s previously called the proposed move “an absolute disgrace” and promised to punish Ford with a 35% tariff on cars made in Mexico that are then sold in America—which he believes will prevent them from moving production out of the U.S.

No one wants American jobs to go away—and Ford plans to build more profitable vehicles in the plants that currently produce the Focus and C-Max small cars. It claims it is not going anywhere and that the U.S. is its home. Reports do indicate that no jobs at the Wayne, MI, plant will be lost, as it will likely be converted to building the new mid-size Ranger pickup truck and, possibly, a new Bronco compact sport-utility.

frangerBut there’s more to the story that isn’t generally being addressed.

Earlier this year, Fields told CNBC: “We’re always going to invest where it makes sense for business.”

Obviously, it no longer makes “sense” to invest in small-car production in America. Most of the news surrounding the move to Mexico addressed the benefit of low-cost labor. According to the Detroit Free Press: “The industry has known for decades that domestic manufacturers struggle to make a profit on small cars.”

In Slate’s MoneyBox blog, Jordan Weissmann says: “You can protest that Ford should find a way to consistently churn out profits while manufacturing small cars at home, but that’s easier said than done.”

The number of auto jobs in Mexico is up 40% from 2008, while they mxcarare only up in the U.S. by 15% over the same period. Reuters reports: “American automakers pay Mexican workers $8 to $10 an hour, including benefits.” By comparison, Ford’s labor costs average $57 per hour at home.

Even with the huge labor cost differential, American car companies’ trucks and SUVs are profitable to manufacture in the U.S. and they are the vehicles Americans want to buy—which should raise the question: Why do car companies make small cars when they can’t make them profitably? The answer is the story not being addressed in the current coverage of Ford. And this is where Trump could, possibly, change the outcome.

In a free-market world, companies that want to stay in business should stop activities that lose money and focus on those that make money. Yet, the big three automakers, continue to produce small cars that for years have made little, if any, money.

fordBusiness Insider explains: “If Ford is going to keep them around, it needs to address the profit problem. Americans don’t want to buy small vehicles at the moment (actually, they almost never want to buy small cars), so Ford’s only rationale for continuing to build them is to satisfy the more stringent fuel-economy standards in the future.”

Those fuel standards are called CAFE—which stands for Corporate Average Fuel Economy. In short, it means that car companies can only sell the bigger vehicles that Americans want, if it also produces cars that achieve very high fuel efficiency (including electric vehicles, in which Ford is investing heavily) that results in an “average” of the mandated miles per gallon—which is now 54.5 mpg by 2025.

Merrill Matthews, Ph.D., a resident scholar with the Institute for Policy Innovation, blames the Ford move on, along with other draconian government policies, the CAFE standards:

The CAFE standards, which began in 1975, require auto manufacturers to meet government-imposed fuel economy standards across a fleet of cars. In order to meet those standards, which have been dramatically increased under President Obama, carmakers have to make light, inexpensive cars with high fuel economy to offset their trucks and SUVs with lower fuel economy. And electric cars really help their fuel economy balance. So the companies make minimally or even unprofitable small cars and electric vehicles so they can sell their popular and profitable large products—and hope for a profit in the end. By moving their small cars to Mexico, which has skilled but cheaper labor, Ford hopes to break even or make a little profit off of them.

While the CAFE standards have increased dramatically under the cafecrazyObama Administration, and have also increased costs for consumers, most people don’t realize that they are not set in stone. Brad Plumer, senior editor for VOX.com, outlines the options: “A new President can revise them, up or down.

These CAFE (corporate average fuel economy) rules are scheduled to come up for a midterm review in 2017. At that point, automakers may lobby to allow the standards to rise more slowly—particularly if sales of fuel-efficient vehicles have been sluggish due to low oil prices. Green groups, meanwhile, could push to make the standards stricter, or to have them keep increasing past 2025, to push vehicle emissions down even further.”

A President Trump could, perhaps, by promising to allow car companies to make whatever kind of cars they want to make, entice Ford to keep its money in America—though, admittedly, there are other factors (such as trade deals) that make manufacturing small cars attractive in Mexico. CAFE is just one of the many policies that make doing business difficult in America.

Revising the CAFE standards, which could reduce the cost of future cars and would remove government intrusion from vehicle selection, is something Trump can do that would make doing business in America “make sense” again for U.S. car companies. For all business, let’s make America a place where it makes sense to invest.

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About the Author: Marita Noon

Marita Noon

CFACT policy analyst Marita Noon is the author of Energy Freedom.,

  • mf

    you will be talking like this until the world economy recovers and the price of oil spikes again. Then, all these customers buying very big trucks will cry “we was betrayed!” and you will write another article that says “it is all the fault of the democrats”. Said customers in turn will blame mexican rapists and wave the confederate flag some more.
    And, to follow your logic further, what does it matter if Ford moves the production of small cars to Mexico? Without Cafe standards these cars would not be produced at all. The demand for big cars is satisfied by the US production. Ford probably sells part of the small car production abroad, everybody gains. The rest of the world is smart enough not to buy very big American cars. They want transportation, not a phallic symbol on wheels. So, in the end, what was your point exactly?
    And then electric cars. They are still expensive, but they are here. If the world listened to your free market counsel, it would be monster trucks forever. Until of course the oil price spikes, and then, “we was betrayed all over again”. Personally, my next car will be plug in hybrid because I can count. US, with 5% of the population uses ~20% of world oil production. Shale or no shale, this advantage will not last indefinitely. And then, we was betrayed all over again. More flag waving and free market mumbo jumbo.

    The day will come, and soon, when you will thank the subsidizers and cafe regulators for their foresight which saved your rear end. Or at least your kids real end.

    • Brin Jenkins

      Hybrid? Where does the electricity come from?

      Do you understand energy?

      • mf

        do you?

      • Immortal600

        Don’t waste your time on the economic moron.

  • America has a faux two party system and I always thought America was a Republic. I guess everybody should realize we are ruled from D.C. plain and simple. This is an eye opening report on General Motors is becoming China Motors.

    May 4, 2012 General Motors is becoming China Motors

    eneral Motors is becoming China Motors. Forget the spin. The evidence is clear and convincing. Did U.S. taxpayers save GM for China? Listen to the candid comments of GM’s CEO.