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Trumping it out

Will a protectionist administration in the White House force our ag equipment industry to move south?

It was a stunning move. Ford’s CEO and president Mark Fields appeared on CNN in January to announce that his company was scrubbing its long-planned construction of a US$1.6 billion assembly plant in Mexico.

Instead, Ford will invest U.S.$700 million in a Michigan facility and boost its workforce in that state by 700.

It looked very much like Ford had succumbed to pressure from incoming U.S. president Donald Trump, who has been threatening U.S. companies that move production outside that country. Any goods that they tried to import back into the U.S. from those plants, Trump said, would get slapped with a 35 per cent tariff.

Trump had also issued a stream of tweets criticizing Ford (sometimes falsely) over its international supply chain and production.

What made the Ford announcement so surprising was that there wasn’t any real substance to the threats. There was no firm government policy in place to prevent Ford from building the Mexican plant to take advantage of lower manufacturing costs. And there were no clear policies to entice them to stay.

“It’s literally a vote of confidence in the pro-growth policies he (Trump) has been outlining,” Fields said during the televised interview, although he couldn’t point to any specific one when pressed.

President and CEO of Ford appeared on CNN to announce Ford will scrap plans to build a plant in Mexico and instead move the investment to Michigan.
photo: Ford

On the same day as the Ford announcement, General Motors took the unusual step of sending out a three-sentence press release to explain its Mexican production. That was in direct response to being mentioned in another loosely accurate Trump tweet that vilified it for building one model of Chevy Cruze in that country.

“General Motors manufactures the Chevrolet Cruze sedan in Lordstown, Ohio,” reads the release. “All Chevrolet Cruze sedans sold in the U.S. are built in GM’s assembly plant in Lordstown, Ohio. GM builds the Chevrolet Cruze hatchback for global markets in Mexico, with a small number sold in the U.S.”

So far, most of what we know about Trump’s policy intentions comes in the form of short statements via similar Twitter storms. He has refused to pay much attention to the mainstream media, avoiding them in a manner reminiscent of Stephen Harper’s last administration here. Clearly, though, CEOs of U.S. auto manufacturers are already feeling the pressure.

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Closeup of the flags of the North American Free Trade Agreement NAFTA members on textile texture. NAFTA is the world's largest trade bloc and the member countries are Canada, United States and Mexico. 3D rendering with detailed textured grunge effect on closeup.

The auto industry isn’t all that different from ag equipment. All the major ag machinery brands build equipment outside of the U.S., and at least some of the equipment ends up for sale in North America. For example, AGCO’s new Global Series utility tractors are built in China. Their Fendt brand tractors are assembled in Marktoberdorf, Germany. John Deere builds some utility tractors and components in Mexico. And the list goes on.

And much of the production from Canadian shortline manufacturers heads south. How might a protectionist stance in the U.S. affect Canadian brands? So far, no one can really be sure. There seems little that the Canadian firms can do but watch and wait.

“I’m actually quite surprised Ford made that stance already without the administration in place,” says Peter Clarke, president and CEO of Saskatchewan-based Seed Hawk, a seeding equipment manufacturer and division of Swedish-owned Väderstad. “There’s a lot of rhetoric going around, so it’s really early to tell what the administration is going to do. I think we wait to see the administration in place.”

In a statement in its official “Industry Advisor” newsletter published in early January, the U.S.-based Association of Equipment Manufacturers (AEM) echoed that sentiment. “The first few months of the new administration should yield significantly more insight as to what a Trump presidency will mean for manufacturing, agriculture and the entire economy,” it reads.

Early on, Trump’s campaign team downplayed fears his anti-NAFTA stance could hurt Canada by implying any threats were really just aimed at Mexico. Now, however, there’s no sign of any special treatment in store for Canadian manufacturers.

The Globe and Mail reported that in a conference call with reporters, Trump’s White House press secretary, Sean Spicer said: “(Donald Trump’s) commitment is to the American worker, and to American jobs, and to American industry, and American manufacturing.”

According to the Globe, Spicer went on to say: “He’s been very clear throughout the campaign that his goal is to put America first, to restore America’s manufacturing base, and so it’s not a question of a particular country vis-a-vis the United States. It’s a question of where America’s place is going to be and where American workers are going to be in his agenda. And that’s first and foremost.”

That makes it clear that if Ford had been planning a facility in Canada instead of Mexico, the end result would probably have been the same.

If the Trump administration does go forward to implement a 35 per cent duty on U.S.-based brands that import production for sale in the U.S., what immediately comes to mind is CNH Industrial’s air drill manufacturing facility in Saskatoon, Sask. It builds all the Case IH and New Holland brand air seeders for the North American market.

Will CNH be taxed into relocating that facility?

So far it’s unclear under exactly what conditions such a duty might apply, and there is the long-standing bilateral free trade agreement in ag equipment that ensures Canadian-built equipment can flow south without any impediment, although Ford for one doesn’t appear to believe that NAFTA, which allows automakers to build some components and vehicles in all three North American countries, will be sufficient to protect it under a new U.S. administration.

Can Canadian machinery brand executives, then, depend on the trade agreement that protects their firms? And what happens to their equipment exports if the U.S. imposes a broad range of new tariff barriers?

Peter Clarke is president and CEO of Seed Hawk.
photo: Seed Hawk

“From an ag perspective, much more equipment moves northbound than southbound,” notes Clarke. “So I wouldn’t expect too much impact on Canadian manufacturers, particularly shortliners anyway.”

“The markets we sell into — Seed Hawk and probably the others across Western Canada — are niche providers of products, so in spite of any tariff decisions, which I think are unlikely, the product would continue to sell.”

And the value of the U.S. dollar has been on an upward march ever since Trump’s election in November. Some economists have pointed out that this could complicate his efforts to reinvigorate American manufacturing, since a high greenback makes U.S.-made goods more expensive in export markets.

That is a problem that U.S.-built ag and construction machinery already faces in spades. Conversely, the exchange rate gives Canadian brands a cushion to soften the impact of any potential new duties.

“We’re sheltered a bit in terms of our action — or reaction — because of the strong exchange rate,” Clarke says. “It’s very favourable to southbound trade. If we were sitting at a level dollar, we might be thinking differently. But the gap is considerable. It’s influential in terms of our sales into the U.S. and I don’t expect that to change too swiftly in the future.”

The reality is that U.S. ag machinery brands might need to be more worried about Canadian retaliatory tariffs.

“Big manufacturers like Case IH and John Deere have been hit hard already with foreign exchange rates,” Clarke notes. “I’d be more concerned about any reactionary response from the Canadian government for trade going northbound that would impact them.”

Despite all this uncertainty, markets have responded very positively with significant gains on stock exchanges, including Ford shares which rocketed up over 3.5 per cent the same day it announced the Mexican investment reversal.

“That (market uncertainty) was accounted for in the runup to the election,” believes Clarke. “There was some instability then. From a U.S. (investor’s) perspective we have a president whose behaviour we may not like, but he’s going to take the country in a direction we like. There’s some stability in that. I’m not surprised markets have been fairly stable through the last couple of weeks.”

While rhetoric still dominates discussion around trade and commerce with the U.S. in the near term, it seems more than likely there will be at least some changes to the status quo.

Could a move toward protectionism inside the White House fundamentally change the pattern of global trade, especially given that the U.S. remains one of the largest consumer markets in the western world?

And, by abandoning pending deals like the TPP, and if it redraws existing deals like NAFTA, would such U.S. moves put an end to the globalization trend, or at least stall it?

“Definitely, it would,” says Clarke. “That’s going backwards in time in terms of policy and thinking. I think Mexico is going to take a harder hit than Canada will in the short term. But he (Trump) might be just as hand-tied as any other president would be.”

In the end, how would protectionist U.S. trade policy affect thinking in the boardrooms of Canadian ag equipment manufacturers?

Says Clarke: “It would change the dynamic of decision-making going forward.”

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