European Carmakers Weigh Options Amid Mexico Tax Threats

European automakers that count on their plants in Mexico to supply the U.S. market are weighing their options in the face of threats from President Donald Trump to impose stiff penalties in his bid to return manufacturing jobs to the United States.

Trump has warned the U.S. could slap massive border taxes on car companies that benefit from selling their vehicles in the U.S., but are not creating jobs for Americans.

Analysts say Trump’s efforts to shift production to the U.S. also ties into his greater strategy on Mexico. Trump has said he wants fair trade that will result in more jobs for Americans, an end to illegal immigration, and an end to the flow of drugs and violence across the U.S. southern border.

Mexico’s extradition of notorious cartel leader Joaquin “El Chapo” Guzman to the U.S. on the eve of Trump’s inauguration is a sign the American president’s strategy could be working.

Trump’s insistence that Mexico pay for a border wall and his caustic response to the cancellation of a visit by Mexican President Enrique Pena Nieto was a signal that the U.S. leader is not ready to soften his approach, despite goodwill gestures from Mexico, which also is the United States’ No. 2 export market.

The president tweeted this on Friday:

In an interview with German newspaper Bild shortly before his inauguration, Trump warned German carmaker BMW to call off its plans for a $1 billion plant in Mexico.

“I would tell them, don’t waste their time and money, unless they want to sell to other countries,” Trump said. “But I would tell BMW if they think they’re gonna build a plant in Mexico and sell cars into the U.S. without a 35 percent tax, it’s not gonna happen.”

BMW and Volkswagen stocks dipped after the remarks were published.

Defying the warning, BMW officials said they would go ahead with plans to complete the plant in the Mexican state of San Luis Potosi that is to turn out the BMW 3 Series sedan in two years.

The risk might be worth it for manufacturers, note analysts.

“German executives tell me it always makes more sense to put your production base closer to your sales operations. For them to make the big swing to Mexico means something is very good there,” said Monica Showalter, a business writer who has written extensively on U.S. trade with Latin America.

“Mexicans offer good tax breaks,” she added. “They also have a pretty good labor force of skilled workers, and their plants are wonderfully well-run.”

European companies like Volkswagen have long depended heavily on their plants in Mexico to supply the U.S. market. Volkswagen also says it will not shift production of its Jetta and Golf models from Mexico.

Company officials instead are highlighting their plans to possibly start producing electric cars in the United States, where the company says it has invested heavily in an assembly plant at Chattanooga in the U.S. state of Tennessee.

“We are really becoming an American car company now,” Volkswagen Chairman Herbert Diess said at the recent North American International Auto Show in Detroit.

Still, Trump’s threats are cause for concern among German carmakers.

“We take the statements seriously,” Matthias Wissmann, president of the German Association of the Automotive Industry, said in a statement. “We have to wait and see whether these announcements will be put into effect by the U.S. administration, and if so, in what form.”

Wissmann said the group is hoping for “considerable resistance” from the U.S. Congress to an import tax.

Both opponents and supporters of Trump were astonished by the Mexican government’s extradition of Guzman, who was flown in handcuffs to New York, Trump’s home city.

U.S. authorities had long called for the Mexican government to hand over Guzman, to no avail. When the extradition finally happened this month, some in the U.S. media interpreted the handover as a farewell gesture by Mexico to outgoing President Barack Obama.

Showalter disagrees. “With the threat of Trump’s wall and the threat of Trump’s taxes, with those things hanging over them, Mexico is saying, ‘We can’t tolerate this. We have to get rid of this cartel problem and we have to get this economy going as fast as we can.’ ”

“I talked to a Mexican columnist in [the Mexican state of] Guanajuato who said, ‘The one thing about Trump is it lights a fire under us to get some reforms going,’ and that is what I think we’re seeing with the Chapo thing,” she said.

Trump’s scolding and threats of a big border tax this month succeeded in getting the U.S.-based Ford Motor Company to cancel plans for a plant in Mexico and add 700 jobs in the U.S. state of Michigan.

Ford Chief Executive Officer Mark Fields said it was a “vote of confidence” in Trump’s economic policies.

For Trump, it meant attaining two key goals: creating American jobs and getting Mexico’s government to change its behavior.