--:-- [Theme music fades out]
--:-- Host (Ryan Knutson): Welcome to The Journal, our show about money, business, and power. I'm Ryan Knutson.
--:-- Host (Jessica Mendoza): And I'm Jessica Mendoza.
--:-- Host (Ryan Knutson): It's Tuesday, March 4th. Today, we're talking about the trade war that's heating up between the US, Mexico, and Canada. President Trump's 25% tariffs on goods from Mexico and Canada took effect first thing this morning.
--:-- Host (Jessica Mendoza): And the American auto industry is going to be hit hard by these tariffs. Many parts and materials come from Mexico and Canada.
--:-- Host (Ryan Knutson): We're joined today by Thomas Koval, CEO of Legera Technologies, a company that makes parts for vehicles. Thomas, thanks for being on the show.
--:-- Thomas Koval: Thanks for having me.
--:-- Host (Ryan Knutson): So, Thomas, your company makes parts for vehicles. Can you tell us a little bit about what you do?
--:-- Thomas Koval: Sure. We make parts for vehicles, things like the shelves inside Amazon vans and those spare tire holders at the back of Jeeps and Ford Broncos.
--:-- Host (Jessica Mendoza): How long have you worked in the automotive industry?
--:-- Thomas Koval: I've actually worked in the automotive industry my entire life, since I was 16 years old. I started working in factories in Germany, and I'm originally from Sweden.
--:-- Host (Ryan Knutson): That's fascinating. So, how much of your production is in the U.S., and how much is outside of the U.S.?
--:-- Thomas Koval: All our production is in the U.S. However, we do have material coming in from other countries. We have material coming from Mexico.
--:-- Host (Jessica Mendoza): As of today, those materials will be subject to a new 25 percent tariff.
--:-- Thomas Koval: That's right. And that'll start immediately.
--:-- Host (Ryan Knutson): So, what does that mean for your company?
--:-- Thomas Koval: Well, we're going to have to deal with that. But the question is, how long will it last for? So a company like ours, we built up inventory to try to see if this is only going to last for two weeks. We're going to be fine. But after that, what happens?
--:-- Host (Jessica Mendoza): If you could use one word to describe the conversations that are going on in the auto industry right now, what would it be?
--:-- Thomas Koval: Instability.
--:-- Host (Ryan Knutson): Not panic or... There's probably a lot of panic at the moment as well.
--:-- Host (Jessica Mendoza): Welcome back to The Journal. We're talking about the trade war that's heating up between the US, Mexico, and Canada.
--:-- Host (Ryan Knutson): And we're joined by Mike Kalias, our colleague who covers the auto industry.
--:-- Mike Kalias: Thanks for having me.
--:-- Host (Jessica Mendoza): So, Mike, how will these tariffs impact the U.S. auto industry?
--:-- Mike Kalias: I mean, there is no industry that has more at stake than automotive. Of all of the trade that happens between Canada and Mexico, the car business accounts for nearly a quarter of that. About 23 percent of cars that are sold in the U.S. are built in either Canada or Mexico.
--:-- Host (Ryan Knutson): That's a lot.
--:-- Mike Kalias: Yeah, it is. And half of the car parts that come into the country that are imported here to be put into cars, about half of that comes from either side of the border. That's $100 billion of stuff.
--:-- Host (Jessica Mendoza): And then beyond the car companies, you know, there are thousands of parts suppliers.
--:-- Mike Kalias: When we talk about an American-made car, what does that mean in reality?
--:-- Host (Ryan Knutson): Well, I think most people think of it as cars that are assembled inside of the U.S. And, you know, most of the cars that get sold in the U.S. are built here. It's a small majority.
--:-- Mike Kalias: But a lot of those cars, the guts of the car is imported. A lot of it from Mexico, a lot of it from Canada. So it can be U.S. built, U.S. made, but, you know, a lot of it's relying on foreign parts.
--:-- Host (Jessica Mendoza): The auto industry's supply chain was shaped by the North American Free Trade Agreement.
--:-- Mike Kalias: NAFTA took effect in 1994 and created a free trade zone between the U.S., Canada, and Mexico.
--:-- Host (Ryan Knutson): Here's President Bill Clinton at the time.
--:-- Mike Kalias: NAFTA will tear down trade barriers between our three nations. It will create the world's largest trade zone and create 200,000 jobs in this country by 1995 alone.
--:-- Host (Jessica Mendoza): President Trump, in his first term, began renegotiating NAFTA.
--:-- Mike Kalias: And that deal, known as USMCA, was finalized in 2020.
--:-- Host (Ryan Knutson): The renegotiation that Trump did in his first term of NAFTA that produced what we call the USMCA now, I mean, it was really, you know, there were some incremental changes.
--:-- Mike Kalias: It required some costs and some investment, and companies had to make more stuff in North America in order to bypass any tariffs. But it was, you know, one executive referred to it as a rebranding, right?
--:-- Host (Jessica Mendoza): I think auto executives went into this feeling like cooler heads were going to prevail in a way.
--:-- Mike Kalias: Under both deals, there were no tariffs imposed on car parts and materials. And so car manufacturing continued to move regularly across the borders with Mexico and Canada.
--:-- Host (Ryan Knutson): So now the auto supply chain includes thousands of companies sending parts back and forth across borders multiple times.
--:-- Mike Kalias: Our colleagues at The Wall Street Journal did a very nice analysis just the other day about how it followed one part, a piston, a pretty basic component that crossed the border six times before it got into a car.
--:-- Host (Jessica Mendoza): It was raw aluminum in Michigan, and then it was shipped to Canada to make into a basic part, and then, you know, back to Michigan for machining, and then down to Mexico to be, like, finished.
--:-- Mike Kalias: And then it went to Wisconsin at one point, and then, you know, back to Michigan to be put in an engine.
--:-- Host (Ryan Knutson): So, like, we don't know exactly if in a case like that, and that's sort of the norm in the industry. We don't know if that's going to get hit every single time, but that's part of the sort of the freakout, right, is people don't know, and they've got to assume the worst at this point.
--:-- Host (Jessica Mendoza): When Trump started floating the idea of 25 percent tariffs on Mexico and Canada, how did the automakers react?
--:-- Mike Kalias: I think on the tariff piece, you know, they felt like they've seen some of the rhetoric and bluster kind of become more manageable once it's put into policy.
--:-- Host (Ryan Knutson): But then as soon as, you know, a week or two after the inauguration, he announced a 25 percent tariff on Mexico and Canada.
--:-- Mike Kalias: I mean, that was just kind of worst case scenario. I mean, he wasn't talking about redoing that trade pact. I mean, he was almost as if he was acting like it didn't exist, right?
--:-- Host (Jessica Mendoza): And so I think plans became a little more urgent then because it was so extreme.
--:-- Mike Kalias: And did auto executives try to negotiate with the Trump administration?
--:-- Host (Ryan Knutson): Yes, there's been an intense lobbying effort going on.
--:-- Mike Kalias: You know, one big point they've made is like, look, you know, you can do this and it's going to hurt everybody in the industry, you know, GM and Ford and Nissan and Honda, but it's going to hurt the U.S. companies more because they have a more extensive footprint in North America.
--:-- Host (Jessica Mendoza): And there are imported cars coming from Japan and Korea virtually tariff-free.
--:-- Mike Kalias: And so, this is going to create an unlevel playing field. It's going to help our competitors and it's going to hurt us.
--:-- Host (Ryan Knutson): But I think the bottom line point that they really been trying to make to the administration is like this is going to have the opposite effect of what you think. Like this is going to hurt our ability to invest in factories and create U manufacturing jobs.
--:-- Host (Jessica Mendoza): Now that the tariffs are in place, what's the auto industry going to do?
--:-- Mike Kalias: That's next. We'll be right back.
--:-- [Theme music plays]
--:-- Host (Ryan Knutson): This episode is brought to you by State Farm.
--:-- Host (Jessica Mendoza): Checking off the boxes on your to-do list is a great feeling. And when it comes to checking off coverage, a State Farm agent can help you choose an option that's right for you.
--:-- Host (Ryan Knutson): Whether you prefer talking in person, on the phone, or using the award-winning app, it's nice knowing you have help finding coverage that best fits your needs.
--:-- Host (Jessica Mendoza): Like a good neighbor, State Farm is there.
--:-- Host (Ryan Knutson): When Thomas Koval, CEO of Leggera Technologies, first heard tariffs might be coming, he tried to come up with a lot of solutions.
--:-- Thomas Koval: As soon as we heard he was going to do the tariffs, we kind of went into a little bit of a war room scenario where we're planning out inventory levels.
--:-- Host (Jessica Mendoza): Can we do bonded warehousing? What are some of the solutions?
--:-- Thomas Koval: Because ultimately, we don't want to impact the customer.
--:-- Host (Ryan Knutson): But the reality is that when we look at it now, we're going to have to have some serious discussions with our customers about this.
--:-- Thomas Koval: This is a pretty significant price increase.
--:-- Host (Jessica Mendoza): So you anticipate passing along these tariffs to your customers, Ford or Jeep or whoever. And then they will pass it along to the consumer?
--:-- Thomas Koval: Yes, that'll happen. We will try to do whatever we can to mitigate that.
--:-- Host (Ryan Knutson): Are you considering moving your supply chain into the U.S.?
--:-- Thomas Koval: We are looking at all solutions that work best for ourselves and for the customer and for the supplier.
--:-- Host (Jessica Mendoza): And I know that sounds like a very political answer, but that's the truth.
--:-- Thomas Koval: It's not so easy. So the truth is, say we wanted to work with our supplier and bring them back up to the United States.
--:-- Host (Ryan Knutson): It's one thing to find the shop floor space and actually build a bank and move the lines.
--:-- Thomas Koval: But you also have to do something called a PPAP. You have to make sure that the product that's coming out of the new plant has been tested and verified.
--:-- Host (Jessica Mendoza): Cars are, of course, a safety product. So they go through rigorous testing and this takes time.
--:-- Thomas Koval: Yeah, what does that mean? Build a bank of material.
--:-- Host (Ryan Knutson): Yes.
--:-- Thomas Koval: So you eat 10 cookies a day. So I produce 10 cookies a day. But now I'm going to have to shut down production because I'm going to move my lines to the United States for 10 days.
--:-- Host (Jessica Mendoza): So I have to build up on Saturdays and Sundays, which is overtime and cost money.
--:-- Thomas Koval: I'm going to have to build up 100 cookies, preferably 130, because who knows, something might go wrong through the process.
--:-- Host (Ryan Knutson): So I have to build up a bank of cookies until I start production back up again in the U.S.
--:-- Thomas Koval: How much would it cost to do that?
--:-- Host (Jessica Mendoza): Wow, that's a good question.
--:-- Thomas Koval: It all depends. If you're able to build a bank, then potentially you can just spend about, I don't know, $500,000, $2 million to bank that material and move it up.
--:-- Host (Ryan Knutson): But if you have to buy new tools and new equipment, depending on whatever commodity that you're in, it could be somewhere from $100,000 to, I don't know, $10 million, something like that.
--:-- Host (Jessica Mendoza): So lots of money.
--:-- Host (Ryan Knutson): Do you understand the rationale behind the tariffs?
--:-- Thomas Koval: I do understand the rationale behind the tariffs. And I really do believe in U.S. manufacturing. And I want to bring more business here.
--:-- Host (Jessica Mendoza): I just wish there was two ways that it was done a little bit differently. One, a longer and better timeline to prepare.
--:-- Thomas Koval: And I would say also from the standpoint of it's quite punitive instead of, say, motivating.
--:-- Host (Ryan Knutson): And whether you want to use carrot or stick, I guess it's my nature. I like to use carrot. I feel this is more of a stick scenario.
--:-- Host (Jessica Mendoza): And given the world that we're in, what is the thing you would ask for? Would you ask for just pledge to keep these tariffs in place so there's certainty and you can work around it or for them to go away?
--:-- Thomas Koval: So if I could ask Mr. Trump one thing, I would ask for more stability for the auto industry.
--:-- Host (Ryan Knutson): So I understand the tariffs. Just wish that it could be, say, more of a motivating standpoint, more of this carrot versus stick scenario and allow for a little bit more time.
--:-- Thomas Koval: I want to see toolmakers, die makers, machine builders, more manufacturing in the United States. I think it'll make us stronger.
--:-- Host (Jessica Mendoza): So if I could ask for something, it would be a bit more time and a clear plan and hopefully some type of agreement between the Democrats and Republicans of how do we want to handle industry in the United States.
--:-- Host (Ryan Knutson): But that's, I think, is maybe too much to ask for.
--:-- Host (Jessica Mendoza): How are you feeling right now?
--:-- Thomas Koval: I'm feeling uncertain, but the one thing that I will say is with automotive, with manufacturing, with Detroit, very, very gritty, hardworking people.
--:-- Host (Ryan Knutson): We've been through this before, I think, hit from left to right for the last couple of years, and we've been able to survive.
--:-- Host (Jessica Mendoza): I know that we will survive.
--:-- Host (Ryan Knutson): I'm very positive.
--:-- Host (Jessica Mendoza): But instead of being able to focus on developing and making our business more efficient with cool technologies such as AI and machine learning and spending our money towards that, the industry is absorbing that money into dealing with having to hold more inventory and moving lines and things like that.
--:-- Host (Ryan Knutson): So that's the sad part about it.
--:-- Host (Jessica Mendoza): Trump's tariffs have ignited a trade war.
--:-- Host (Ryan Knutson): Overnight, China announced new tariffs after Trump added another 10% levy on Chinese goods.
--:-- Host (Jessica Mendoza): Mexico's president said she planned to retaliate, and Canada said it would impose 25% tariffs on nearly $100 billion worth of U.S. imports.
--:-- Host (Ryan Knutson): Trump then warned Canada that he could raise his tariffs even further.
--:-- Host (Jessica Mendoza): Economists have told our colleague Mike Kalias that American consumers will bear the brunt of this trade war.
--:-- Mike Kalias: I think that's generally the expectation. I mean, it's going to get passed on to the consumers.
--:-- Host (Ryan Knutson): And, you know, you see a lot of different estimates. But I think the sort of sturdiest ones I've seen is if a car costs right now mid $40,000 is kind of the average that an American pays for a car.
--:-- Mike Kalias: It's going to tack on 7, 8 percent in inflation to that. So that's a $3,000 or more hit.
--:-- Host (Jessica Mendoza): And there are estimates that are much more than that for larger cars.
--:-- Mike Kalias: So, yeah, I think the expectation is going to be borne by the consumer.
--:-- Host (Ryan Knutson): So we've moved from the era of North American cooperation to a full-scale trade war.
--:-- Host (Jessica Mendoza): It sure feels like that.
--:-- Host (Ryan Knutson): And it comes at a time where there's already an affordability problem in the industry.
--:-- Mike Kalias: I mean, cars are something like 30% more expensive. People are paying 30% more for cars today than they were, you know, just before the pandemic.
--:-- Host (Jessica Mendoza): That's just going to exacerbate a problem that is already tough on a lot of American consumers and car dealers and companies.
--:-- Host (Ryan Knutson): Before we go, we're interested in hearing from you. Do you have any questions about what's happening with the Trump administration? About Trump's speech to Congress or the war in Ukraine or tariffs?
--:-- Host (Jessica Mendoza): Email us and let us know. Please send us a voice note to thejournalatwsj.com.
--:-- Host (Ryan Knutson): That's thejournalatwsj.com.
--:-- Host (Jessica Mendoza): That's all for today, Tuesday, March 4th.
--:-- Host (Ryan Knutson): The Journal is a co-production of Spotify and the Wall Street Journal.
--:-- Host (Jessica Mendoza): Additional reporting in this episode by Christopher Otz.
--:-- Host (Ryan Knutson): Thanks for listening. See you tomorrow.
