CAFE Standards Distort Auto Production and Push Jobs South

Once praised for refusing to accept a bailout, Ford is now taking heat for deciding build all small cars in Mexico.  Ford already manufactures the Fiesta model in Mexico, and the Focus and C-Max will follow after the newly-proposed $1.6 billion plant is finished.  Given that Ford sales have risen strongly since the recession, what is the reason for this change in direction?  The easy answer — labor costs. However, it is also likely that government regulations have helped them to shift jobs south.

In August of 2012, the Obama Administration called for more arduous demands in the Corporate Average Fuel Economy (CAFE) standards for automotive companies. President Obama raised the current mandate of 35.5 MPG (miles per gallon) to an ambitious 54.5 MPG by the year 2025.  But don’t be fooled by this figure.  According to John O’Dell, senior editor at Edmunds.com, “the government measures fuel economy — in more lab-like, less real-world conditions — so the actual mileage goal is closer to about 36 miles per gallon.” Regardless, Obama’s CAFE adjustment poses a tall task for automakers.

As with many government regulations, they can be complex, confusing, and seem to always distort things in such a way to create artificial incentives or loopholes. CAFE is no exception – in apart because automakers can reach the 54.5 MPG milestone by taking the average fuel economy across its respective fleet (cars sold per year). O’Dell comments that, “there will be 10 miles per gallon trucks and 50 miles per gallon vehicles”. To makes matter even more perplexing, the government created a “footprint” model which multiplies the vehicle’s wheelbase by its track (in square feet) to gauge the size (or footprint) of the vehicle. The government has a chart which dictates what the fuel economy must be for a given vehicle based on its footprint. This chart is limited though, because the smallest footprint corresponds with the Ford Focus while the largest footprint corresponds with the Chevy Silverado – meaning that cars smaller than the Focus only have to match the MPG of the Focus while trucks even large than the Silverado still have to match the MPG of the Silverado.

What is a car company to do?  As can be seen, each automaker’s ability to adhere to CAFE depends on the sizes of the vehicles it builds. An automaker’s fleet CAFE target is calculated by averaging the footprint-based MPG for each vehicle it sells per year.  It is important to note that there are two CAFE targets – one for cars and one for trucks.  Ford recognizes this distinction between cars and trucks. The major moneymaker for Ford resides in larger models, such as trucks and SUVs. Thus, there is still incentive in selling smaller cars – especially the Focus, which will be counted on to be a leader in fuel economy for the company so as to lower the overall MPG across the Ford fleet.

However, building new Focus models to maintain compliance with CAFE car-sector guidelines proves costly – likely prompting Ford’s investment in Mexico.  Smaller vehicles already produce slimmer profit margins as compared to trucks and SUVs.  Responding to demanding CAFE requirements means more R&D and product innovation will be required.  These are all costs to be burdened by Ford.  Acting rationally, the company must make cost-cutting efforts, and this time it means moving a large amount of production out of the United States for the purpose of saving on labor expenses.

In addition to losing American jobs and manufacturing, CAFE gets in the way of letting the market run its course.  Oil prices and consumer preferences foster demand for more different types of vehicles. When oil skyrocketed in 2004, for example, many Americans demanded vehicles that provided more MPG.  This period resulted in free-market advancements with automakers responding to consumer demands by making hybrids, higher MPG models, and investing in other ways to harness alternative fuel.  Now, in 2016, Americans are choosing trucks and larger vehicles given lower oil prices. With Obama’s CAFE update, the government is essentially forcing car manufactures to sell smaller, fuel-efficient vehicle in a market where Americans prefer larger vehicles.

CAFÉ has also been advocated on a set of weak assumptions, the first being that fuel consumption will fall by 12 billion barrels. As noted by multiple authors from Car and Driver magazine, manufacturing more fuel-efficient vehicles may in fact incentivize Americans to drive as much and far – all for the same price as before. Thus, consumption reductions will not be realized.  Further, smaller cars will become more costly and possibly lead to a surge in demand of larger, gas-guzzling trucks or SUVs – essentially defeating the purpose of CAFE.

Second, many automakers began using lighter material inputs to construct vehicles. This is argued to make driving more dangerous, as less heavy vehicles tend to get crushed more easily in serious car accidents.

Stringent, high-demanding government rules such as CAFÉ make it that much tougher for companies such as Ford to prosper. Not only will some Americans lose out on jobs provided by manufacturing the Ford Focus, but consumers will pay steeper prices for new vehicles.

Matthew Ruland is a contributing author for the NCPA’s blog.

 

 

Comments (4)

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  1. RobM says:

    CAFE and over-regulation is the culprit. Absolutely. I wish Trump would publicly state this and tell Ford and others, if elected, he will work very hard to remove all those imposed mandates because exactly what you said…. it’s all based on bad math and assumptions.

    To me it goes hand in had with the idiocy of carpool lanes.. an idea so awesome! We’ll coerce people to carpool!… but it makes traffic jams worse. But… it’s a great idea! … but it makes things worse…

    • Matthew Ruland says:

      Rob M. – Thank you for the comment.

      I agree with you. CAFE is the culprit.

      Regarding Mr. Trump, I have heard him mention eliminating burdensome regulations/mandates. This seems to be a major economic policy goal for his potential administration. Should be a good thing if implemented. We need to cut the red tape in order to allow businesses – especially small and medium-sized – to thrive.

      However, I am not well versed with his views on taxing products shipped back into the U.S. What is Mr. Trump’s stance on tariffs and/or taxing those foreign-made goods?

  2. Matthew Ruland says:

    Rodney – Thank you for the comment. You and I would most likely agree that it is preferable to keep U.S.-based companies in this country rather than having them leave.

    However, U.S. companies have the right and freedom to expand operations in foreign nations as they please. Products brought back into America should NOT be subject to higher taxation, because ultimately the American consumer will have to pay higher prices. Using cars, you are probably assuming that the higher tax will incentive American consumers to buy a car from another car company. But that other car company will be able to raise its selling price near (but not over) the new price Ford will have to sell it for in order to make profit. In the end, this type of gov. regulation only increases the cost of goods. This hurts the American consumer.

    Also, think about it this way. What if Ford uses an operating system designed by an American tech group (all American workers). If Ford sales go down due to this new tariff/tax, then consequently the American tech group will lose out on sales and suffer as well. The economy is complex; thus, it is best for the government to NOT intervene by imposing burdensome taxation and regulation.

    Regarding your comment about $80+ an hour, I am not sure what you mean. Would you mind expanding?

  3. Matthew Ruland says:

    John – Thank you for the comment. I agree with you on both points. Ford is moving some of its operations to Mexico because of a burdensome government regulation (CAFE), not because they necessarily want to.

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