The Economic Impact of the Automotive Industry

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 2020, the U.S. automotive industry contributed 3% to the U.S. gross domestic product (GDP). That’s $627 billion out of the total $20.93 trillion U.S GDP for that year between vehicle manufacturing and sales. On average, the industry employed 4.1 million people in the United States, as of Q1 2021.

In 2019, 10.8 million cars and trucks were produced in the United States and 13.7 million were sold, including cars and trucks produced in the United States, Canada, and Mexico. According to the American Automotive Policy Council, this level of production will increase to an average of 12 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 was worth $162 billion in 2019. It is projected to reach $802 billion by 2027. This is due to electric vehicles’ efficiency and environmental advantages over gasoline-powered vehicles. Electric vehicles emit 54% fewer CO2 emissions than the average new gas-powered vehicle. There are 1.6 million EVs on the road today. By 2030, there will be 18.7 million. The biggest obstacles to the EV market today are the high cost of manufacturing, charging times, and battery life. People are also concerned that there aren’t enough charging stations and the range is too limited, but those obstacles will likely decline as automakers reach economies of scale.

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 one 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 that already had government subsidies.

The U.S. government’s $80 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 (TARP). In the end, taxpayers lost $9.8 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, automakers used 0% financing plans to lure buyers. Union members were paid $70 per hour, on average, in 2007.

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 the 62.5% in the original agreement. At least 30% of the car must be made by workers earning at least $16 per hour, and that number will rise to 40% in 2023.

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.

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