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WASHINGTON — In January 2017, gauging whether the administration of President Donald Trump would be pro-business or populist was a challenge.
One year into the administration, it still is.
Industry watchers say 2017 proved to be positive on balance, especially with the late enactment of tax legislation. But they’re still unclear about the potential risk to their bottom line from government policies in the years ahead.
Republicans control Congress, but legislative achievements were difficult to attain. Political analysts give Democrats a solid chance of retaking the House, if not the Senate, in midterm elections, which could slow any progress toward regulatory liberalization.
“On average, it was a good year for the industry. There was some easing of regulatory restrictions, but there are still a number of questions, such as uncertainty over NAFTA,” said Mark Aiello, co-chairman of the automotive industry practice at law firm Foley & Lardner.
“Some regulations were changed, others were not and some are under discussion. So, it’s a mixed bag at this point.”
The president last month signed legislation lowering corporate and individual tax rates. Workers could start seeing larger paychecks sometime next month, although changes to the standard deduction and caps on itemized deductions could hurt certain taxpayers. The tax package also reduced rates for closely held partnerships such as auto dealerships, while retaining interest deductibility for floorplan financing.
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The tax cuts will benefit bottom lines, but no one can say for sure whether the extra income will spur car buying. Plus, the complexity of the bill and the speed with which it was passed will create unintended consequences requiring legislative and administrative fixes that have yet to be worked out, said Dave Regan, executive vice president of legislative affairs for the National Automobile Dealers Association.
Gains from tax cuts could be offset by other factors, said Kristin Dziczek, director of industry, labor and economics at the industry-sponsored Center for Automotive Research. Most Americans will see incremental pay increases rather than a one-time check, and a large portion of the cuts go to people wealthy enough to buy a car at will. Add to that expected increases in interest rates and a potential contraction in credit due to the increase in subprime defaults, and it’s not clear whether the tax cuts will spur consumer demand, she said.
“On the economy, Trump is a bit of a mixed blessing for the industry,” said Charlie Chesbrough, senior economist at Cox Automotive. “The increase in the stock market, as a result of his deregulatory policies, has raised the net worth of car buyers, especially higher-income folks, so that’s been a net plus,” along with the tax cuts.
“At the same time,” he added, “the real risks in the vehicle market come from government policy either in interest rates that come too fast or too soon, or some fiscal or trade policy that could have negative implications.”
The threat of a government shutdown also looms large over the auto market amid an impasse over immigration and spending issues. Lawmakers were scrambling to reach an agreement ahead of last week’s deadline to avert a shutdown, though a short-term spending deal wouldn’t eliminate the threat of a shutdown later. If the government closes, hundreds of thousands of federal workers will be temporarily furloughed, which will reduce consumption.
“The economy has been doing very well, but it’s also at a late stage in the business cycle,” Chesbrough said.
“So, it could be more vulnerable to the shock of a government shutdown where people are not paid, which could have a very detrimental impact on the economy and vehicle sales.”
On the supply side, the Trump administration’s war on free-trade agreements has created severe uncertainty for manufacturers, who rely on foreign production and components to remain competitive. Trump pulled the U.S. out of the Trans-Pacific Partnership trade deal, and the status of the North American Free Trade Agreement, the U.S.-Korea trade agreement and a decision on whether to take remedial action against steel imports are all up in the air.
The White House could try to walk away from NAFTA and its tariff-free benefits. Meanwhile, after months of delay, the Commerce Department last week formally submitted to Trump the results of its so-called 232 investigation into the effect of steel imports on national security. The investigation was instigated with the idea of protecting the domestic steel industry, but there are many more jobs tied to steel usage in industries such as autos than to steel production. And while China has flooded the global market with steel, not that much of it is shipped to the U.S., Dziczek said.
Trump has 90 days to decide any potential action based on the findings.
“Government uncertainty is injecting uncertainty for both car buyers and sellers,” Chesbrough said.
At automakers’ request, the Trump administration is re-examining fuel economy and emissions requirements after Obama officials sped through a midterm review to determine whether they are realistic. Car companies are also pleased at efforts to better align the Obama-era program with the fuel economy standards of NHTSA and California.
Manufacturers should be wary of drastic changes to the standards, Chesbrough said, because if the domestic industry doesn’t keep up with the move to alternative fuels in other countries, the U.S. will be consigned to being a regional market.
Deregulation and infrastructure
Congress and the White House moved to curtail the reach of the Consumer Financial Protection Bureau, which Republicans have long vilified for having too much unchecked power to police consumer financial markets, banking and auto lending.
Both chambers of Congress voted to bar mandatory arbitration in lending disputes, and Trump installed his own budget director as interim CFPB director after Richard Cordray resigned in November.
Infrastructure investment, a key Trump campaign promise, is back on the agenda, with bipartisan bases of support, but it’s uncertain how much money would be applied to highways, systems for vehicles and infrastructure to communicate with each other and electric charging infrastructure.
The House and a key Senate panel have passed legislation governing the development of self-driving cars and their safe deployment on public roads, but several senators are holding up a final bill because of concerns over issues such as liability, cybersecurity and the pre-emption of states’ ability to regulate the vehicles.
Meanwhile, the Department of Transportation issued new federal autonomous driving guidelines in September and plans to introduce a third version of the voluntary guidelines this summer. The guidelines should provide more clarity to automakers on how they can test or even launch highly autonomous vehicles without running afoul of federal standards written for more conventional vehicles.
Automakers applauded the move to align regulatory policy on autonomous vehicles and make it easier to invest in the technology. They were less sanguine about the Trump administration’s apparent move to postpone a decision on dedicated short-range communications that would allow vehicles to communicate with each other over wireless networks.
The auto industry has spent years developing protocols for short-range communications as an added line of defense beyond cameras and sensors, and government approval would greatly ease standardization during the transition to driverless cars.
“When you look at our net position, we’re in a stronger position from a policy perspective,” said Mitch Bainwol, president of the Alliance of Automotive Manufacturers.