Analysis
20 Oct 17

Auto industry without NAFTA

In the wake of the fourth round of North America Free Trade Agreement negotiations, it looks like automakers and suppliers from the United States, Mexico and Canada may soon need to prepare for a world without NAFTA.

To qualify for export tariff exemption under the 23-year old agreement, Washington wants 85% of the content of cars made in the region to originate from North America and most of it - at least 50% - to come from the United States.

Today, while NAFTA stipulates that 62.5% needs to come from North America, the US content represents about 30%.

Although the administration of President Donald Trump is focused on boosting US employment  and reducing its trade deficit by favoring local production and restricting low-cost parts coming from countries like Mexico, China and others, the new rules could end up backfiring.

While using more US content would initial benefit local companies, the cost of manufacturing would likely increase, thus lowering the competitiveness of automobile manufacturing in the US as well as Canada and Mexico.

If costs rise due to the NAFTA disruption, our US investments (about US$1bn/y) will likely diminish, according to Ian Musselma who is the director of government affairs for Germany-based automotive parts and equipment supplier  AG.

"If you renegotiate without making tariff changes, you might as well abandon the entire agreement," Musselma was quoted as saying by online news portal Automotive News.

Ignoring NAFTA

There are two key ways to cut cost in automobile manufacturing. One way is to use more automation, something that could benefit robot suppliers in the US such as Fanuc Corp. and ABB Robotics.

They are both marketing relatively inexpensive "collaborative" robots that can operate alongside human workers without a metal cage or plastic shield.  They start at approximately US$20,000, the news portal said.

The other way is ignoring the NAFTA tax break altogether and opting for lower-cost auto parts abroad. Just as Germany looks to Poland, Romania or Slovenia, and Japan looks to Thailand, India or China, a number of North America companies will likely follow suit and just pay the export tariffs on cars they actually send out of the country.

While Mexico and Canada would need to pay a 2.5% duty on cars going to the United States (25% for pickups currently being built in Mexico), the US would need to pay a 6.1% duty for cars going to Canada and 20% for cars going to Mexico, something that would likely reduce trading between the three.

For the US, it could end up balancing out its trade deficit as the car loving country imports about four times more from its neighbors than it exports.

On Oct 12, Canadian Prime Minister Justin Trudeau and Mexican President Enrique Pena Nieto met in Mexico City to discuss the matter. NAFTA negotiations are expected to be wrapped up by the end of the year.

 

Authored by: Daniel Bland