Since the economic crisis of 2008-2009, the U.S. auto industry has been on a tear. Despite the claims of the Trump administration, there are 1 million more cars per year built in the United States now than in 1993. The United States has never before seen such extraordinary automotive production, and the industry has not been this competitive against foreign imports since the 1960s. Between 2009 and 2016, more than 276,000 automotive jobs have been added in the United States (a jump of 41.6% percent), jobs with generous salaries and benefits. Auto-parts producers have also benefited as service providers, as vehicle sales have risen to record levels.
What made this transformation possible? In part it was due to changes demanded by the government in exchange for bailing out the industry, and in part to the opportunity seized by the industry to modernize practices that had held back its competitiveness. But a major factor in the automotive renaissance in America has been the role played by the integrated production system incorporating suppliers and plants in Mexico and Canada, and across the world.
The North American Free Trade Agreement currently requires that 62.5 percent of the value of a car sold in the three markets must have originated in the region for it to qualify for tariff-free entry. This means that critical components such as body work, steering columns, and engines are fabricated in different parts of the NAFTA region, the final vehicle is assembled in any one of those countries, and so long as 62.5 percent of the value originated in the region, it can be sold as a NAFTA car. This spurs cross-industry efficiencies and synergies, and it helps form long-term productive relationships. Workers in all three countries depend on the productivity of their counterparts in other parts of the regional supply chain to preserve their jobs. The remaining 37.5 percent of content that comes from outside the region allows companies to lower their costs and to price their vehicles more competitively. This means that consumers in all three countries benefit from cheaper, higher quality vehicles than would otherwise be possible.
And yet the Trump administration is unhappy with the current configuration of the North American auto sector and has repeatedly attacked the $54 billion deficit in the auto industry. To address the perceived problem in the auto trade, U.S. Commerce Secretary Wilbur Ross and U.S. Trade Representative Robert Lighthizer have put forward changes to existing NAFTA rules that put these efficiencies, productivity, and relationships in jeopardy.
The first and most damaging change relates to the administration’s goal of raising U.S. content in finished products. Ross has proposed a minimum level of 50 percent U.S. content in goods sold in the United States for those goods to qualify for tariff-free access under NAFTA. Not only does this violate the spirit of NAFTA (and for that matter of most free trade agreements), but it also threatens the competitiveness of the North American auto industry. Automotive firms rely on integrated regional supply chains to lower the costs of the final product sold to the consumer so that it can compete against imports from other parts of the world. By combining the NAFTA economies’ natural and technical endowments, cars produced in North America are able to outcompete imports from overseas. Sadly, not all American-made auto components are as competitive as they once were. Remember, this does not only apply to the big American automakers such as Ford and General Motors. It also applies to foreign companies such as Volkswagen or Toyota that depend upon plants in all three countries to lower costs.
The second rule change Lighthizer has proposed is to raise the regional content requirements to a minimum of 80-85 percent. This may sound like a winning proposal for all three NAFTA partners, but the logic against it is similar. The automotive supply chains in the United States, Canada, and Mexico are not only deeply integrated with each other, but also with suppliers in other parts of the world. If firms are forced to use this elevated level of regional content in their finished product and cannot source the parts they need from within the region at a competitive price, then they will turn to suppliers outside NAFTA, pay the WTO tariff level of 2.5 percent, and pass the cost of the duty on their products to the consumer.
The vast majority of U.S.-based automotive companies passionately oppose these proposals, and a new Boston Consulting Group study estimates that 24,000 jobs could be lost as a result of the U.S. government’s proposals. Already we have seen vigorous public debate and rejection of the ideas by the sector, at the same time as key business groups in all three countries have called on the Trump administration to moderate its tone and its protectionist tendencies. If the U.S. government fails to heed these calls, it risks squashing an American auto success story that has brought prosperity and stability to hundreds of thousands of workers.
