(November 30, 2018) U.S.-Canada Auto Pact’s fuel-economy regulation established subsidies, handouts that carmakers now love to game.
Don’t blame General Motors or declining market demand for automobiles for the plant closings in Canada and the U.S. announced this week. The closings are largely the work of governments.
Demand for cars hasn’t plummeted, as some media outlets have reported. Sales on the whole are actually up this year, part of a steady trend of more vehicles sold over the past decade. Sales are dramatically down only for sedans, specifically the gasoline-powered species of sedans that governments have targeted. In contrast, sales are way up for SUVs and light trucks, vehicles that governments have favoured. Little wonder, then, that GM announced it would scrap many of its sedan models — along with the plants in Ontario and the U.S. that produce them — and switch to vehicles that governments either tolerate or bless. Ontario, doubly uncompetitive due to high taxes and high electricity costs, was inevitably a loser.
Before the U.S. government introduced Corporate Average Fuel Economy (CAFE) standards to increase the distance cars could travel per gallon of gas, sedans and full-size station wagons were popular and SUVs were unknown. CAFE, which effectively governed the entire North American market thanks to the Canada-U.S. Auto Pact, incented manufacturers to artificially raise the cost of large passenger cars in order to favour smaller, more fuel-efficient vehicles. It soon claimed its first victim: the full-size station wagon, whose flexible interior accommodated both passenger and cargo needs, and which, at its peak, came in 62 models to satisfy different tastes.
But, although CAFE priced the station wagon out of the market, the market still demanded a vehicle that offered its flexibility. Enter Lee Iacocca, the chairman of Chrysler, who helped develop the minivan and convinced the U.S. government to deem it a truck rather than a passenger vehicle, thus exempting it from the strict CAFE standards that killed the station wagon. The minivan took off — the first 1984 model, built in Windsor, sold 209,000 its first year — followed by the SUV, which also was deemed a truck rather than a passenger vehicle. By 2000, the passenger car had less than half the market. Today it accounts for only about a third.
CAFE standards didn’t only claim certain car models as victims, they also made the whole industry a victim by making it dependent on government whims and then handouts. CAFE also distorted the market by creating credits for ethanol and electric vehicles and by creating a lobbyist’s dream through ever-changing regulations that led car manufacturers to continually game the system to favour their own vehicles over those of competitors.
Perversely, by improving mileage, CAFE also increased distances travelled and emissions of pollutants such as carbon monoxide and nitrogen oxides. The 2025 CAFE targets (since cancelled by President Trump) ran to almost 2,000 pages and were estimated to add an average of US$1,946 to the cost of a vehicle. Tax loopholes also helped accelerate SUV sales — like all light trucks, they were exempted from the gas-guzzler’s excise tax and also given preferential tax treatment as business vehicles.
The gaming continues with GM’s decision to close five plants, an opening move in a new round designed to get more subsidies, especially for electric vehicles, where GM engineering has had a poor track record. Since 2000, GM has received US$50 billion in grants and loans from U.S. governments and at least $10.8 billion from Canadian governments. In response to GM’s handout requests, Prime Minister Justin Trudeau is playing nice, indicating he’s willing to play GM’s game. President Trump is indicating he’s interested in an entirely different game.
GM announced it would scrap many of its sedan models — with the plants that produce them — and switch to vehicles that governments either tolerate or bless
Rather than acceding to GM’s request for richer subsidies for its electric vehicles, Trump has ordered his administration to detail GM’s subsidies with a view to eliminating them all, starting with the electric vehicle subsidy of up to US$7,500 per car. Tariffs on GM imports are another club that Trump is threatening to use to save American jobs.
GM may well surrender to Trump’s club, but a carrot might suit it better. GM, whose profits historically depended on large gasoline-powered cars, was hurt more than other companies by CAFE standards. Abolishing CAFE and the many preferences given to electric vehicles — without which they would lose virtually their entire market share — would level the playing field back in GM’s favour. Sedans would lose much of their price disadvantage, electric vehicles would cease to be a threat and GM could bring back its once-lucrative station wagons.
The economy and the citizenry would also benefit. Abolishing CAFE altogether would increase sales by lowering auto costs, reducing harmful emissions, making producers more competitive, adding diversity to the automobiles on offer and creating demand for more automobile plants.
With the world, and especially the U.S., awash in oil, the original rationale for CAFE — to reduce America’s dependence on foreign oil — is obsolete. Trump helped make America’s energy industry the world’s largest — and cemented CAFE’s obsolescence — by deregulating the energy industry. He can do the same for the automobile industry by deregulating it and requiring it to survive without handouts. As for Ontario’s industry, short of providing more ruinous taxpayer subsidies, there’s no hope without cutting corporate taxes and power rates.