Print Friendly and PDF

NAFTA Talks Threaten Auto Industry Boom

U.S. pullout, rule changes may unravel deeply integrated parts supply chain in Michigan

By: James Amend

President Trump made renegotiation of the North American Free Trade Agreement (NAFTA) a key objective of his administration. While the automotive industry generally supports updating the 24-year-old agreement, the risk of a U.S. withdrawal remains genuine and tinkering with its fine print could unravel a global supply chain built on the untaxed movement of goods and services across borders.

Talks to preserve the tax-free zone between Canada, Mexico and the United States were to continue into April, but with rhetoric high around thorny, automotive-related issues, especially so-called rules of origin, an outcome favorable to automakers and their suppliers remains in the balance.

“The constant risk has been (the United States.) would pull out, and an end to NAFTA creates confusion,” said Kristin Dziczek, director of the Industry, Labor and Economics Group at the Center for Automotive Research (CAR) in Ann Arbor.

One of the world’s largest free-trade zones that was widely supported by both Republicans and Democrats at its inception, NAFTA is seen by most economic observers as an engine for job growth and prosperity in each of the member countries.

“The United States presents many opportunities and an attractive environment for business investment and NAFTA is a big reason for that,” said Lisa Davis, CEO of global supplier Siemens USA, which has invested $40 billion in the United States in the last 15 years on the back of NAFTA.

However, Trump believes NAFTA led to a hemorrhaging of U.S. jobs to Mexico, where dramatically lower wages create a costfriendly manufacturing environment. Critics claim it also torpedoed a once-balanced trade relationship between the two countries. According to the U.S. Department of Commerce, the country is saddled with a $463 billion trade deficit vis-à-vis Mexico.

Others blame technology for the job losses. According to a report from CAR, 87 percent of U.S. manufacturing job losses between 1979 and 1990 were due to factors such as automation. Outsourcing accounted for another 15 percent. At the same time, nonproduction jobs and wages have soared and the United States remains the No.2 vehicle producer globally. Mexico is seventh and Canada ranks 10th.

Jobs at parts makers also are robust at 871,000 across 50 states. Including indirect employment, suppliers account for 4.26 million jobs, according to the Motor Equipment & Manufacturers Association (MEMA). Since the recession, supplier employment has grown 19 percent to drive economic growth and MEMA ties NAFTA directly to the boom.

The biggest sticking point for the automotive industry centers on rules of origin, which under NAFTA calls for 62.5 percent of the net cost of light vehicles to be made in North America. It already is the highest content threshold of any free-trade pact but President Trump wants it raised to 85 percent and half the content of the car or truck made in the United States. The plan would clarify where individual pieces of a component set originate, the White House said, because some are made outside of North America but assembled into a larger unit here and counted toward the 62.5 percent threshold by shifting tariff-free benefits to them.

Mexico and Canada want rules of origin untouched and agree on a Canadian proposal that expenses from engineering research and other advanced work be counted toward the regional total, but U.S. negotiators rejected that model. Some see the refusal purely as a negotiating tactic.

CAR believes that if NAFTA crumbles, North American production costs will rise, returns to investors will fall, consumers will have fewer choices, the United States will become less competitive globally, and 31,000 automotive and parts jobs would be lost.

Michigan would be hit particularly hard, Dziczek said, because it is the No.1 trader of parts with Canada and Mexico. Toyota Motor Corp. has invested $23 billion in the United States directly over the past 60 years, employs 136,000 people, and will invest another $10 billion over the next 10 years. NAFTA makes that possible, said Ed Lewis, director of public policy communications for Toyota.

“If (NAFTA) goes away, we would see more, not fewer, imported vehicles,” he said. “Automakers and suppliers may shift production elsewhere. China could become a more dominant player in automotive parts, components and intermediate goods.”

Ian Musselman, director of government affairs at global supplier Continental, which has invested $5 billion in the United States over the last five years and employs 190,000 people in North America, said NAFTA adds value in other ways than the bottom line.

“One of the great things that we have done is expanded work with internships and apprenticeships,” he said. “But (we’re) also learning from other cultures.”

Siemens’ Davis admits there is room for improvement within NAFTA, however.

“The pact was done before the internet and needs to catch up to our digital world,” she said. “We just need to make sure, above all else, it helps American business stay ahead in the global economy.”