Trump’s NAFTA Strategy Could Shift the Auto Industry’s Supply Chain

Trump’s NAFTA Strategy Could Shift the Auto Industry’s Supply Chain

Trump’s NAFTA Strategy Could Shift the Auto Industry’s Supply Chain

 “Disrupting this integrated supply chain would increase prices, lower sales, threaten exports and endanger American workers’ jobs,” the Alliance of Automobile Manufacturers said.

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Future Plans

Trump’s jawboning may be having an effect. Some automakers and parts suppliers are waiting to see how the negotiations play out before deciding on any actions, said Gregory Husisian, co-chair of the automotive industry team at Foley & Lardner LLP in Washington. “It’s put a bit of a freeze on future investment plans.”

Still, there’s nothing stopping car companies from shifting production to another country if North America becomes too expensive. Ford Motor Co. last week announced it will build its Focus small cars in China, canceling plans to move production to Mexico, in a decision that Lighthizer called “troubling.”

Many economists argue trade deficits have more to do with the difference between savings and investment within a nation than the treaties it negotiates. By that logic, if the U.S. keeps investing more than it saves, it will keep posting trade deficits. Even if America’s trade deficit with Mexico disappears, it may simply migrate somewhere else.

Convincing automakers to re-shore production in the U.S. could give a short-term boost to the economy, helping Trump fulfill his promise to lift growth to 3 percent annually and create employment. Since the financial crisis, manufacturing jobs in the auto sector have been climbing steadily as companies have ramped up output — though the employment level remains far below previous decades.

But longer term, it’s no guarantee that re-shoring would be a jobs bonanza. Automakers are increasingly using robots to automate assembly-line tasks, a trend that could eventually decouple the link between production and jobs.

“Look at the picture of a factory 50 years ago — it’s stuffed with people. Look at the same picture today, and there’s very few people,” said Harris, the Bank of America Merrill Lynch economist. “It’s really hard to turn back the clock.”

There’s already evidence automakers and their suppliers may not even need Nafta. Under the agreement’s rules of origin, cars must have North American content worth 62.5 percent of the vehicle’s value.

But companies can ignore that rule if they pay the basic 2.5 percent tariff the U.S. levies on car imports from countries that are members of the World Trade Organization. Currently, about 5 percent of cars and parts imported from Mexico enter the U.S. in that manner.

Commerce Secretary Wilbur Ross has expressed optimism the U.S. could reach a new deal with Canada and Mexico by early next year. Lighthizer was less bullish last week on that timeline, stressing that the administration won’t hold itself to any deadline. The U.S. is holding public hearings this week to inform its negotiating objectives.

“This is going to be a lot harder than they think,” said Caroline Freund, senior fellow at the Peterson Institute for International Economics in Washington. “It seems increasingly likely to me that they’ll take some incremental approach.”

Even if Nafta talks falter, the administration may seek to negotiate a single-industry deal that limits the amount of cars and parts imported from Mexico, said Freund. In the early 1980s, then-president Ronald Reagan convinced Japan to sign a “voluntary export agreement” under which it cut the number of cars it sold to the U.S., setting off a string of similar deals on everything from steel to shoes.

“That might be a direction they take to increase U.S. content,” said Freund. “But Americans are going to pay for it.”