U.S. Auto Industry Needs NAFTA
By Tim Triplett
President Trump has vowed to renegotiate, or perhaps even withdraw, from the North American Free Trade Agreement, which has been the foundation for commerce between the United States, Canada and Mexico since 1994. Rather than creating new jobs for Americans, such a dramatic change could be disastrous for the U.S. economy, and for automotive suppliers in particular. “A wholesale withdrawal from NAFTA could set in motion a series of unintended consequences that would constrain future growth of the U.S. automotive industry,” concludes a new NAFTA Briefing from the Center for Automotive Research.
Over the years, a complex, mutually beneficial interdependency has evolved between the NAFTA nations. The trade agreement cut customs on goods that move between the three countries, allowing vehicle manufacturers and their suppliers to establish low-cost supply chains and better compete on the global stage. It has attracted billions of dollars in domestic reinvestment and new foreign direct investment, including such foreign brands as Toyota, Nissan and Honda.
If it were even possible to withdraw from NAFTA, that does not necessarily mean Americans would regain thousands of auto-related jobs. Automakers could not simply shift vehicle production from Mexico to the U.S. They don’t have the capacity. It would take years and investment of billions in new plants and equipment, at a time when the market is plateauing. Some might opt to set up shop in Canada instead, where the supply chains are already established, or they could choose to supply the U.S. market from outside of the NAFTA region.
Although the Trump camp claimed a small victory when Ford recently cancelled construction of a new Ford Focus plant in Mexico, the decision was more about market fundamentals than any political pressure, says Bernard Swiecki, senior automotive analyst for CAR. Ford still plans to build the Focus in Mexico, but in an existing plant that produces the Ford Fusion. “The company determined it could meet current demand from one plant instead of two and saved over a billion dollars in the process,” Swiecki says. “First and foremost, the car companies are responsible to their shareholders. Political favor was not the driver of the decision.”
Any move by the U.S. to withdraw from NAFTA or otherwise restrict automotive-related trade within North America will result in higher costs to producers, lower returns for investors, fewer choices for consumers and a less competitive position for U.S. automakers and their suppliers, concludes CAR’s analysis. Counter to the Trump administration’s goal of creating manufacturing jobs, withdrawal from NAFTA or the implementation of punitive tariffs could result in the loss of at least 31,000 U.S. automotive and parts jobs, and possibly thousands more if a trade war erupts.
“Repeal NAFTA” may make for a catchy campaign slogan, but fixing the negatives of NAFTA without damaging the U.S. economy calls for much more careful consideration.