The Economic Impact of the Automotive Industry

Woman charging electric car on street - stock photo

Nancy Honey / Getty Image 2019

Auto and auto parts stores are the largest component of total U.S. retail sales; they make up 20% of the total. That includes auto dealer sales of both new and used vehicles and auto parts.

In 2018, the U.S. automotive industry contributed 2.7% to U.S. gross domestic product. That's $545.4 billion out of the total $20.5 trillion produced. Of that, $327.1 billion was auto manufacturing and $218.3 billion was vehicle retail sales. On average, the industry employs 17.9 million people.

In 2017, 17.4 million cars and trucks were sold, and the American Automotive Policy Council predicts that this will level off to an average of 16.8 million per year through 2025.

Electric Vehicles

Demand for electric vehicles is driven by buyers who want fuel-efficient, high-performance, and low-emission vehicles, and governments are driving more demand with regulations that encourage alternative fuel vehicles. Countries have agreed to reduce greenhouse gas emissions to comply with the Paris Climate Agreement, as greenhouse gases are one of the factors causing global warming.

According to Allied Market Research, the global electric vehicle market is growing 22% a year. In 2017, it was $119 billion. It's projected to reach $567 billion by 2025. This is due to their efficiency. Electric vehicles emit 54% fewer CO2 emissions than the average new gas-powered vehicle. There are 1.2 million EVs on the road today. By 2030, there will be 18.7 million.

The biggest obstacles to the EV market is the high cost of manufacturing, charging time, and battery life.

People are also concerned that there aren't enough charging stations and the range is too limited.

But those obstacles will decline as automakers reach economies of scale. In 2017, China was the world's largest producer. It manufactured 680,000 EVs, more than the rest of the world combined.

2008 Auto Industry Bailout

In December 2008, the Big Three automakers—General Motors, Chrysler, and Ford—asked Congress for financial aid similar to the bank bailout. They warned that General Motors Company and Chrysler LLC faced bankruptcy and the loss of 1 million jobs. The Ford Motor Company didn't need the funds since it had already cut costs, but it asked to be included so it wouldn't suffer by competing with companies who already had government subsidies.

The U.S. government’s $80.7 billion bailouts of the auto industry lasted between December 2008 and December 2014. The U.S. Department of the Treasury used funds from the Troubled Asset Relief Program. In the end, taxpayers lost $10.2 billion.

The Treasury Department lent money and bought stock ownership in GM and Chrysler, providing incentives to spur new car purchases. In effect, the government nationalized GM and Chrysler just as it did Fannie Mae, Freddie Mac, and insurance company American International Group.

Many in Congress opposed the bailout. They argued that the automakers had not been competitive for years. They resisted making EVs. Instead, they focused on reaping the profits from gas-guzzling SUVs and Hummers. When sales declined in 2006, they used 0% financing plans to lure buyers. Union members were paid $70 per hour, on average, and GM had twice as many brands as needed. It also had twice as many dealerships, thanks to state franchise regulations.

NAFTA's Impact on the Auto Industry

President Donald Trump negotiated a new NAFTA agreement in 2018, which changes NAFTA in six areas; one of the most important being auto manufacturing.

Under the new deal, auto companies must manufacture at least 75% of the car's components in Canada, Mexico, or the United States—that's more than 62.5% in the original agreement. At least 30% of the car must be made by workers earning at least $16 an hour, and this number will rise to 40% in 2023.

It's also triple what the average Mexican autoworker makes.

Autos that don't meet these requirements will be subject to tariffs. The agreement protects Mexico and Canada from any future U.S. auto tariffs.

These changes should create more U.S. jobs for autoworkers, but they could also reduce U.S. jobs for cars sold to China. The higher labor costs will make them too expensive for the Chinese market, as China has traditionally served as the place where labor is performed for very low costs. This means the price of cars sold in America will increase, and some small cars will no longer be sold in North America.

Article Sources

  1. U.S. Census Bureau. "Advance Monthly Sales for Retail and Food Services, August 2019," Page 5. Accessed Sept. 30, 2019.

  2. U.S. Bureau of Economic Analysis, "GDP by Industry, Value Added by Industry, Value Added By Industry (A) (Q) " Annual Industry Data, Lines 21 and 22. Accessed Sept. 30, 2019.

  3. American Auto Council. "2018 Economic Contribution Report," Page 6. Accessed Sept. 30, 2019.

  4. Allied Market Research. "Global Electric Vehicle Market Overview," Accessed Sept. 30, 2019.

  5. Edison Electric Institute. "Electric Companies Are Leading on Clean Energy," Page 2. Accessed Sept. 30, 2019.

  6. Electric Vehicle Transportation Center, "2015 Electric Vehicle Market Summary and Barriers," Page 2. Accessed Sept. 30, 2019.

  7. U.S. Department of Treasury, "Treasury Announces TARP Investment in GMAC," Accessed Sept. 30, 2019.

  8. Wharton School of Business, "The Auto Bailout 10 Years Later: Was It the Right Call?" Accessed Sept. 30, 2019.

  9. Reuters. "Ford-UAW Deal Cuts Wages to $55 An Hour," Accessed Sept. 30, 2019.

  10. United States International Trade Commission. "U.S.-Mexico-Canada Trade Agreement: Likely Impact on the U.S. Economy and on Specific Industry Sectors" Page 18–19. Accessed Sept. 30, 2019.