Donald Trump, who becomes President of the U.S. on Friday, has taken aim at automakers by proposing to withdraw from or renegotiate NAFTA, and place a 35% tariff on vehicle imports. It's part of his ambitious plan to boost jobs in the U.S. and accelerate the economy. (See: Depression-Era Headwinds Restrain the Economy.)
But a major report from CAR, the Center for Automotive Research, indicates that Trump's plans, if implemented, would damage his efforts, hampering both growth of U.S. jobs and the economy. CAR forecasts at least 31,000 U.S. auto industry jobs would be lost from withdrawal or the implementation of tariffs. They see an additional 6,700 vehicle assembly jobs lost throughout North America if the tariff were imposed. Part of those losses would be in the U.S.
Trump's plan would "result in higher costs to producers, lower returns for investors, fewer choices for consumers, and a less competitive U.S. automotive and supplier industry," CAR says in its report.
Additionally, consumers would face higher prices. Basic economics indicates that higher prices would lead to lower sales, dampening any potential increase in American auto industry jobs. Indeed, a follow-on effect would be that buyers of higher-priced vehicles would then have less to spend on other U.S.-made goods and services.
Trump has focused on trade deficits with key trading partners as a negative trend. During the first eleven months of 2016, Detroit’s Big Three manufactured 19% of their vehicles in Mexico and 13% in Canada, per analysis by Bloomberg. The U.S. trade deficit in vehicles over this period was $28.6 billion with Canada and $18.3 billion with Mexico. On vehicle parts, the deficit with Mexico was even larger, over $24 billion. With Canada, the U.S. had a parts surplus of about $12 billion.
Benefits of NAFTA
NAFTA allows automotive manufacturers and parts suppliers to optimize production by locating facilities in the lowest-cost locations within the signatory nations (the U.S., Canada and Mexico), the CAR report notes. This keeps domestic automakers competitive with expanding global rivals from Europe and Asia. The agreement has also led to billions of dollars of new investment in the U.S. auto industry, from both domestic and foreign sources, CAR says.
In 2015, Mexico purchased $308 billion of other manufactured goods from the U.S., according to the CAR report. If NAFTA unravels, Mexico is likely to impose retaliatory tariffs, and import more from the other 45 nations with which it has free trade agreements. Ironically, given Trump’s concerns about China, that nation is likely to become a bigger global player in auto parts, components and intermediate goods if he exits NAFTA.
A Global Industry
The CAR report notes that the automotive industry depends on global supply chains, and has been highly integrated globally since its earliest decades. Thus, any attempts to shut off Mexico as a low-cost manufacturing venue likely will result in a shift of production to alternative destinations abroad, including Asian nations such as South Korea.