NAFTA

Trump's NAFTA Demands Could Crash the U.S. Auto Industry

The administration pushes harsh protectionist measures at the Montreal NAFTA talks.

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A worker on the assembly line at Chrysler's Jefferson North Assembly Plant, Detroit, Michigan, USA
Jim West imageBROKER/Newscom

It's been a bad week for free trade.

On Tuesday, the Trump administration announced steep new tariffs on washing machines and solar panels. Importers of cheaper foreign washing machines will now be hit with levies of 20 to 50 percent, while solar panel makers will see a new 30 percent charge on their wares.

To make matters worse, the administration announced those tariffs the same day that official gathered in Montreal to renegotiate the North American Free Trade Agreement (NAFTA). The new trade barriers added yet more tension to talks that were already strained by Washington's protectionist demands.

U.S. negotiators want to increase the percentage of North American–made parts required for an automobile to be sold tariff-free in the NAFTA nations. This has provoked strong opposition from Canada, from Mexico, and from the American automotive industry, which says the change would be devastating for car manufacturers and retailers.

"There are no products made in North America today that would meet the U.S. proposal," says Matt Blunt, former Missouri governor and current president of the American Automotive Policy Council. "If we don't have a NAFTA we can use, it's the equivalent of not having a NAFTA."

Under current NAFTA rules, vehicles can be sold tariff-free in North America as long as some 65 percent of the parts (as determined by value) are manufactured in Canada, Mexico, or the United States. The Trump administration wants to increase this "rule of origin" requirement to 85 percent. It wants 50 percent of the parts to be made in the United States.

Current U.S. tariffs on automobiles range from 2.5 percent on cars to a whopping 25 percent on light trucks.

U.S. Trade Representative Robert Lighthizer contends that an updated NAFTA requires stricter rule-of-origin rules to protect American jobs. Last August he declared that "in the auto sector alone, the U.S. has a $68 billion [trade] deficit with Mexico. Thousands of American factory workers have lost their jobs because of these provisions."

It is true that full-time manufacturing jobs are down slightly for vehicle and parts makers, from roughly 1 million workers in 1992 to 946,700 in 2017. This dip has little to do with shipping jobs overseas; its chief causes are technological innovation and swings in the economic cycle. Auto manufacturing jobs grew after NAFTA was implemented in 1993, hit a high in 2000, and didn't fall below pre-NAFTA levels until the Great Recession.

Meanwhile, Association of Global Automakers President John Bozzella notes that American production of automobiles has gone nowhere but up.

"If you look at what has happened under NAFTA, we've been incredibly successful. We are making over a million more cars and trucks every year in the United States than we were before NAFTA," he tells Reason.

In 1992—one year before NAFTA was signed—the U.S. manufactured 9.6 million vehicles, according to the Bureau of Transportation Statistics. In 2015, the number was 12.1 million vehicles. The United States has also been exporting more vehicles too since the implementation of NAFTA. In 1993, the United States exported 492,200 autos. In 2016, the figure was 1.3 million. (Those figures do not include minivans and sport utility vehicles.)

By creating a continent-wide auto market, Bozzella points out, NAFTA has encouraged the United States to innovate and thus to increase production. "If we become an island market, that innovation will take place elsewhere," Bozzella says. "It will take place in Asia and China, it will take place in Europe, and it will not take place in the United States."

On top of all that, U.S. negotiators are pushing yet another bad idea in Montreal: a sunset clause that every five years would allow a NAFTA member to withdraw unilaterally from the pact. Blunt says this would cripple business planning and investment. "With an industry like ours, where the product cycles can be more than five years, it would clearly create uncertainty that would clearly undermine the case for investment in North America."

Canada has proposed a rule-of-origin compromise that would raise the amount of North American–sourced material to 85 percent but include in that figure the value of a vehicle's software. Mexico has suggested an extension of the talks if a deal isn't reach by late March, when negotiations are currently scheduled to end.

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  1. I oppose Trump on legal immigration and free trade, but this “sky is falling” rhetoric is only playing into his hands on these issues.

    In the post below, Dalmia is comparing deporting illegal immigrants to Auschwitz.

    Now he’s gonna do what the UAW failed to do and destroy the auto industry?

    Why are you lowering the bar for him? Now all he has to do is not burn Dreamers in ovens and not destroy the auto industry in order to succeed?

    If you keep this up, you’re gonna get him reelected.

    1. Now he’s gonna do what the UAW failed to do and destroy the auto industry?

      Wasn’t it destroyed about 10 years ago?

      1. Clawing itself out of its grave.

      2. Yes, but Obama saved them from themselves.

        And the alternative to being bailed out with TARP funds wasn’t destruction. The alternative to being bailed out with TARP funds was the UAW caving on their demands.

        Once Obama expressed an interest in bailing out GM, the head of the UAW at the time immediately broke off negotiations over UAW concessions with management and entered into negotiations with Obama over a takeover.

        No, the alternative to the bailout was not the destruction of GM. The alternative was the UAW making concessions, particularly on the issue of pensions.

        P.S. GM is only one portion of the auto industry. Toyota and Nissan build autos here in the U.S., too. They were here before NAFTA, and if NAFTA disappeared tomorrow they’d still be here. That is, of course, no reason to do away with NAFTA. Unlike Ron Paul, I support NAFTA–despite the negatives.

        If NAFTA disappeared tomorrow, it would be bad for trade, but not the end of the auto industry or the end of the world. In fact, it might be good for the American auto industry–at the expense of consumers. I oppose Trump on NAFTA, in no small part, because of the positive consequences for consumers.

        1. it might be good for the American auto industry–at the expense of consumers

          quizzicaldog.jpg

          1. Consumers will be no worse off with tariffs.

            Your analysis in deficit in being one dimensional. Yes consumers may pay more. Supply and demand would force the extra to be limited to the extra cost of production which in NAFTA the difference in wages, there being little other advantage to outsourcing. But those wages would be paid to workers. Workers and consumers being the same people there is no net harm to consumers. All the money they lose to higher prices is offset by higher wages.

    2. The trick is to praise him incessantly, and then he can never live up to it.

      1. Actually, I didn’t say that.

        Theoretically, people could oppose his policies on a realistic basis.

        1. And what in the article is not realistic? Or is it because Christian made a crash pun in the title and so you assume that he meant the entire US auto industry will disappear forever immediately?

          Because assuming the one you’re disagreeing with is taking an extreme point so you can disagree harder is exactly what you’re complaining about.

          1. Headlines are the only thing undecided voters will remember in 3 years.

          2. My comment wasn’t only about this post, and why should headlines be free from criticism?

            1. Because even with the headline making a pun, you still seem to just assert that the article made a more extreme claim then it did. So, my point is even if we do just judge a book based on it’s cover, you assumption from it was unreasonable.

    3. I oppose Trump on legal immigration and free trade

      I don’t believe you.

      1. What specifically from this article do you disagree on, Ken?

      2. I’ve never argued for anything but secure, open borders–last week or ten years ago.

        Just because I’m intellectually honest enough to call out bullshit–even when it’s spewed in favor of my own position–doesn’t mean my position is other than what it is.

        I believe that setting the rules for naturalization is within the proper purview of democracy and that the constitution enumerates that power to congress for that reason. I believe that open borders would be more secure than what we have now because if we had a treaty that let any Mexican citizen cross the border simply by showing an ID and checking them against a database of convicted felons, wanted criminals, etc., then the only people sneaking through miles of desert in the middle of the night would be the people who aren’t allowed to come into the country–and would make them much easier to catch.

        1. I agree. I’m pretty open borders, but I skip Dalmia’s posts because they’re overly sensational. I agree with her position but my God she has no sense of scale. Everything is hyperbolic with her.

      3. Because I understand that inflicting an unpopular immigration policy on the American people is like inflicting an unpopular tax or an unpopular war, I know that we will never get the support of enough Americans for an open borders treaty with Mexico to get the senate to ratify such a treaty–until the border is secure. Because I’m not an authoritarian, I think we should do perfectly constitutional things like secure our border to get the American people’s support for more legal immigration. In fact, I’m convinced that more legal immigration will only come at the expense of illegal immigration, much like legal marijuana comes at the expense of the black market.

        I remained convinced that labor is a resource and that having more of a resource available to the economy for less is good for economic growth–and that the free flow of labor across our borders has the same benefits as the free flow of goods. I continue to urge my fellow Americans to support an expansion of legal immigration to include all Mexican citizens who don’t obviously present a threat to our rights or security.

      4. If you think my intellectual honesty means I’m anti-immigration, then you’re probably intellectually dishonest. My libertarianism is such that because I think the truth has a libertarian bias, I have no fear of honesty. It’s the authoritarians who have to lie to make their arguments seem true.

        If you think I’m anti-immigration or anti-free trade despite everything I’ve written here over the past 14 years in favor of open borders, free trade, and legal immigration, then you’re probably an idiot.

    4. If you keep this up, you’re gonna get him reelected.

      +1 dimension of chess

    5. Ken, I don’t necessarily disagree that hyperbolic criticism of Trump is unhelpful. But I do find it funny to see this argument pop up so much here nowadays, when I never once recall seeing it used against hyperbolic criticism of Obama.

      1. When I accused Obama of nationalizing GM, it was because he nationalized GM.

        When I accused Obama of having killed more children than Adam Lanza, it was because he killed more children than Adam Lanza (using drones).

        When I accused Obama of caring more about refugees and people in developing counties than the welfare of Americans, it was because he agreed to accept dangerous refugees that the Australians rejected and because he signed onto the Paris accord that was meant to make Americans sacrifice their standard of living for the benefit of people in the developing world.

        Deporting illegal aliens is not like baking children in the ovens of Auschwitz, regardless of the fact that I oppose Trump on the issue of legal immigration.

        I’ll use Nazi comparisons myself if and when the comparison is apt. If our leaders don’t like being compared to Nazis, then they shouldn’t do things like use national tragedies like the Reichstag fire as an excuse to come after our civil rights.

        Show me an apt comparison, and I probably won’t complain.

        Barack Obama thought the proper purpose of his presidency was to use the coercive power of government to force individuals to make sacrifices for what he saw as the greater good. To whatever extent he was successful in doing that, the comparisons to various authoritarianisms were apt.

        1. Was I saying you personally said anything? I’m just saying that it was not uncommon on this site, or libertarian and conservative sites in general, to find plenty of hyperbolic criticism of Obama. Here alone, there were plenty of comparisons to Stalin and Mao, and overexaggerations about the impact of some of his policies, much like the ones you talk about regarding Trump. And on a lot of conservative sites, there was routinely crap along the lines of how he was plotting a Muslim Kenyan Communist takeover that would result in a dictatorship under sharia law.

          I never once recall anyone here or on any of those sites saying “Hey, if we want to oppose Obama, let’s tone done the hyperbole and keep things reasonable, or else we are going to set a low bar for him in the minds of everyone else.” But I see this argument all the time nowadays regarding Trump, and not just from you. It often comes off as concern trolling since the people saying it are often sympathetic to Trump if not outright supporters of him.

      2. Wait…didn’t he get re-elected?

        1. What’s your point?

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  2. “If you look at what has happened under NAFTA, we’ve been incredibly successful. We are making over a million more cars and trucks every year in the United States than we were before NAFTA,” he tells Reason.

    That’s answering a different question from the one people are probably concerned about.

    1. I’m not making an argument for or against, but they’re trying to make comparisons to 1992 which was, notably, about 26 years ago. That’s a long enough period of time that I hesitate to attribute every single last good thing in the intervening time solely to NAFTA.

      Maybe they acknowledge that a bunch of other factors are at play, but it seems they want to hang their hat on NAFTA and only NAFTA ‘saved’ vehicle manufacturers in America, but I do recall the American auto industry getting a massive Federal bailout since 1992. That seems significant to me.

      1. I don’t know that they were arguing that the numbers are entirely due to NAFTA, I think it’s just a response to the misconception that the industry here has collapsed since NAFTA was implemented.

        Also, keep in mind that a bunch of cars are made here by foreign companies (Nissan, Toyota, Honda, etc.) which weren’t in need of a bailout (and IIRC Ford was not either), it’s not just about the Big 3 these days.

        1. If my memory is correct, Ford was the only one who repaid the bailout but it’s been longer than five minutes since that happened so I could be way off base.

          The point I’m trying to make here is that they are offering data with many possible inputs and saying ‘look, see, NAFTA did amazing things’ without seeming to mention all those other inputs.

          Trump is specifically trying to protect domestic auto makers, and those auto makers seem to be the specific one’s that almost went belly up within very recent memory. This makes me wonder how exactly NAFTA did great things for domestic auto makers when they are the specific one’s who seemed to have the biggest issues.

          I was against the bailout at the time, and I’m in agreement that Trump’s trade policy was basically stolen off Sanders, but this NAFTA argument doesn’t appear to make a lot of sense on either side. And, finally, ‘free trade’ isn’t even on the table so lets not pretend we’re not all arguing for different flavors of managed trade.

      2. My only point is that people are probably concerned about number of people employed. Answering that production is still high is not a bad piece of information, but was probably not what people are most concerned about.

  3. These are *American* companies we’re talking about, they have a duty to do what’s best for the nation and it is government’s job to provide leadership and direction in telling them what’s best for the Motherland. That’s the very definition of capitalism – the private ownership of the means of production with government controlling the ends of production. Everybody works together for the common good because we’re stronger that way, like a bundle of sticks is stronger than any individual stick. Why would you want to be an individual stick when you can be part of a glorious bundle? That’s just selfish, putting yourself before others, privileging the wants of the few over the needs of the many. It takes a village to point out that you didn’t build that, you know.

    1. These are *American* companies we’re talking about, they have a duty to do what’s best for the nation

      Do you know what that’s called?

        1. Someone gets it.

    2. Or like how the fibrous tissue of our muscle unites to form a stronger thing than any one strand.

        1. That’s what he asked Stormy Daniels to do.

    3. “These are *American* companies we’re talking about, they have a duty to do what’s best for the nation and it is government’s job to provide leadership and direction in telling them what’s best for the Motherland….”

      I happen to be slogging through a book on FDR just now, and you might be laughing, but lemme tell ya…

  4. What I find hilarious is that liberals complain all the time about corporations moving money off shore. Trump has found a way to get companies to bring at least some of the money back to the US.

  5. On the one hand, as a libertarian I hope that we keep the old NAFTA rules, because tariffs are bad. On the other hand, it will be amusing to hear my left-wing neighbors argue that Americans have the right to buy cheap cars.

  6. To paraphrase Ross Perot …

    If you think today’s NAFTA is bad, wait until you hear the giant sucking sound caused by Trump’s NAFTA II

  7. Under current NAFTA rules, vehicles can be sold tariff-free in North America as long as some 65 percent of the parts (as determined by value) are manufactured in Canada, Mexico, or the United States. The Trump administration wants to increase this “rule of origin” requirement to 85 percent. It wants 50 percent of the parts to be made in the United States.

    Kind of like a Jones Act for cars…

  8. REASON is a site full of open borders anarchists and UNconstitutional TRADE DEALS..

  9. Government will let no good process go unfucked up…

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  11. President Donald Trump’s verdict for Mexican-made car tax in the U.S. has threatened auto industry completely. Car prices will definitely become high and even finding discount car parts become tough in this condition.

  12. “In 1992?one year before NAFTA was signed?the U.S. manufactured 9.6 million vehicles, according to the Bureau of Transportation Statistics. In 2015, the number was 12.1 million vehicles.”

    – 1992 population: 256.5 milllion
    – 2015 population: 320 million

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  15. “NAFTA has encouraged the United States to innovate” Really? So the US is unable to be innovative without foreign assistance? Really?

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