NAFTA

Trump's NAFTA Antics Will Drive America's Auto Industry Into a Ditch

With friends like Trump, U.S. car makers don't need enemies.

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The North American Free Trade Agreement (NAFTA) survived another round of negotiations between the United States, Canada, and Mexico last week, but

American Car
Stephen Shaver/UPI/Newscom

the Trump administration's unreasonable demands on rules of origin for the auto sector threaten to run the successful 24-year-old agreement off the road.

President Trump has been bashing NAFTA for years, describing it during the 2016 campaign as "the worst trade deal ever." He came into office promising to either radically overhaul the agreement to better favor American companies and workers or to terminate it entirely.

In a sixth round of negotiations last week in Montreal, the president's like-minded U.S. Trade Representative Robert Lighthizer pressed a key U.S. demand that Canada and Mexico agree to revise the agreement's rules of origin to require more U.S. content in vehicles that qualify for duty-free treatment under NAFTA.

Under current rules, for a motor vehicle to enter the United States duty-free from Canada or Mexico, at least 62.5 percent of its content must originate in the three North American countries. In a misguided effort to boost U.S. auto production, the Trump administration is demanding that the rules be changed to require 85 percent NAFTA content, with 50 percent from the United States.

Such a demand would be protectionist in its impact, severing North American auto producers from their global supply chains, ultimately making U.S.-based automakers less competitive in global markets, reducing their sales, production, and employment.

The current 62.5-percent requirement is relatively strict already by global standards. It was the result of a compromise when NAFTA was being negotiated in the early 1990s. The U.S. auto sector—back then essentially Ford, GM, and Chrysler—demanded a minimum content requirement of 60 percent. Canada wanted no higher than 60 percent and Mexico wanted 65, so the three parties split the difference.

By all objective measures, NAFTA is working well, for the U.S. economy and the U.S. automotive sector. In 2017, U.S.-based automakers produced 11.1 million cars and light trucks. That number has not declined since NAFTA was enacted in 1994, and is in fact above the average annual output of 10.9 million assemblies during the past 30 years. Real U.S. output of motor vehicles and parts, adjusted for inflation and quality, is up 85 percent since the passage of NAFTA, according the Federal Reserve Board.

Because of NAFTA, domestic U.S. automakers have been able to deploy their supply chain across North America, creating lower-value vehicles and parts in Mexico while concentrating higher-end production here in the United States. The result has been a U.S. auto sector that is able to deliver more affordable and higher quality cars and trucks to American families while competing more effectively in global export markets. In recent years, U.S. exports of motor vehicles have topped 2 million for the first time.

Tightening the rules of origin or, even worse, scrapping NAFTA entirely would put those competitive gains in jeopardy. "We are a seamless manufacturing platform, and it would be extremely difficult to unwind that," noted John Bozzella, CEO of the Association of Global Automakers, at a forum last year. "You will create a big advantage for other manufacturing platforms around the world. We have to be very careful that we don't upset that balance between global competitiveness and supporting U.S. production."

It's not even clear that imposing the higher rules of origin demanded by the Trump administration would support U.S. production. If the content rules become onerous, vehicle and parts producers in Canada and Mexico may decide to skip NAFTA qualification and simply pay the normal 2.5 percent car duty the United States assesses on most-favored-nation imports. Cars imported outside of NAFTA, from Canada and Mexico and countries outside North America, would almost certainly contain less U.S. content than those now produced within NAFTA.

Unlike the Trump trade team, the negotiating teams from Canada and Mexico have put forth reasonable proposals that would build on the success of NAFTA. In the most recently concluded round, Canada proposed that content rules be expanded to include expenses for engineering, research and development and other high-value-added services that are essential to producing cars but are not counted in the current rules on North American content. Mexico welcomed the proposal as "innovative"; USTR Lighthizer rejected it out of hand.

What's fascinating about the Trump administration's negotiating position on NAFTA is how little support it has received from the domestic industries it is supposedly championing. The Detroit Three automakers have made it clear that they are content with the existing NAFTA-content rules. The administration's agenda is also opposed by the foreign-owned auto manufacturers that operate affiliates in the United States, which now make nearly half of the cars built by American workers in the United States each year.

NAFTA can certainly be updated and modernized, for the auto sector and for trade generally. The almost quarter-century-old agreement needs chapters on digital commerce and state-owned enterprises, and better protections for intellectual property. (Those are all features, by the way, that were contained in the Trans-Pacific Partnership trade agreement that the United States, Canada, and Mexico all signed during the late stages of the Obama administration but that President Trump scrapped upon entering office.)

As for the core of NAFTA, which is zero tariffs on all goods trade among all three of the North American economies, the agreement has proven a boon for the U.S. automobile industry. By trying to grab the wheel and force an unwelcome change in the rules of origin, the Trump administration risks running a well-tuned and competitive U.S. industry into the ditch.

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  1. By all objective measures, NAFTA is working well, for the U.S. economy and the U.S. automotive sector.

    True, but you won’t convince the Bernie-Bros or Trump-tards of that (who are both equally ignorant).

    1. Seeing as how Boosh and Obama already wrecked that car, this seems like more TDS.

      Free trade is the best.

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  2. “By all objective measures, NAFTA is working well, for the U.S. economy and the U.S. automotive sector.”

    So, is Reason going on record as supporting the protectionist automotive manufacturing policies that are incorporated in NAFTA?

    This article implies that Trumps 85% NAFTA content is absurd, but 62.5% is acceptable. That seems like a tenuous position for a supposedly Libertarian magazine to take.

    I could understand if you were arguing that the 62.5% was ridiculous and that Trump is moving in the wrong direction. Instead you seem to be upset with Trump but fine with the status quo.

    1. In a misguided effort to boost U.S. auto production, the Trump administration is demanding that the rules be changed to require 85 percent NAFTA content

      RIF

    2. NAFTA’s working well compared to there being no exemptions from the gen’l duties which existed before the Can-Am agreement & then NAFTA. The default is the duty mentioned in the blog entry, not duty-free trade. I think we did well to get those agreements.

    3. Perfection is the enemy of good enough. It’s pretty damed obvious you don’t believe in anything less than perfection, and so will get perfectly rotten as your reward.

      Favoring existing imperfection over worse imperfection is not incompatible with wanting less imperfection.

      1. “Favoring existing imperfection over worse imperfection is not incompatible with wanting less imperfection.”

        Sure, which is pretty much exactly what might last line said. But this article implies that the current system is perfect. Not, that it’s heavily flawed.

        Frankly, no one is going to win the argument that 62.5% is fine, but 85% is just ridiculous. It’s like arguing that a $15 per hour minimum wage would be perfect, but a $25 per hour minimum wage is just ridiculous.

        1. But plenty of people would make that argument, and win. I don’t understand why you don’t think people can argue quite reasonably over quantities, some winning & others losing.

  3. I think what Trump has in mind, as with most of his policy, is to go back to how it was before the early 1980s, when it was rare to see a foreign car on the road and the average American car lasted about 30,000 miles (my parents went through 3 Oldsmobiles in 5 years). But hey-think of all the people they kept employed.

    1. never had a car that didn’t last over 150k but then I keep them maintained. Had vehicles from the 60’s, 70’s, 80’s, 90’s & 2000’s

    2. 5 million people with above average pay and platinum pensions were kept employed

      The only car my mother ever bought new was a Dodge Omni GLH-T which blew a motor at 30k, took 3 months to repair, and then blew again after another 30k.

      Last American car she ever bought. Made right here in the USA.

      What’s with the number 30,000 in particular?

      1. Well I’ve owned nothing in my life but ford explorers, a 99 4 door, 01 sport, 08 4 door, 07 4 door. I’ve been hit 3 times in major accidents, hit 6 deer, countless miles 4 wheeling…etc. On top of normal driving. Among all 4 I’ve put at least 100k miles on each personally, and all had well over 160k when i got rid of them.

        Between the 4 I’ve replaced 2 transmissions outside normal service, wear/tear. In over .5 million miles.

        What’s this prove?

        Nothing other than your mom probably sucked at maintaining a vehicle and probably bought a lemon.

        1. My mom drove cars into the ground, but by the late 80s/early 90s, most American automakers began using Japanese engines (from Mitsubishi for Chrysler and Mazda for Ford)-these lasted significantly longer (well over 100K). GM engines continued to suck well into the 00s.

          1. That was limited to only small engines, and those agreements only lasted a small amount of time, and aren’t the case today. You’re basically talking neon engines for chrysler and 4cylinder ranger n escorts for ford. I don’t think any of the dodges used mitsu v6s other than the stealth which was just a 3000gt. Pretty sure the vans n cars still used dodge 6ers. I certainly don’t remember the 3 diamond logo on my friends old intrepid engine headers like you saw on neons.

            What’s truly hilarious is the lack of considering the impact of labor costs and our shitty unions on this process, and forcing the manufacturing of these parts in other countries in the first place. These things are sourced from other countries in the first place largly because our costs have been artificially inflated by labor unions. Not just the uaw increasing the price of the car itself, but the steel n labor unions that jacked up the prices of the steel and aluminum needed to build them. All the way down the supply chain unions have increased our costs.

        2. The point is the modern cars last about >150k miles WITHOUT the maintenance. Keeping a 1980 K-car running for 120k miles was possible, but took a money to do it. As opposed to my 1995 Jeep that lasted 160k miles with no maintenance cost other than brakes, tires and burn-out tail lamps. And I am not good with changing the oil on any regular schedule. It would still be going it I wanted to put the $3000 for the transmission rebuild.

          1. So why are we using one of the shittiest cars from the shittiest era of cars as our benchmark for quality again?

            Most people are bringing up cars we all know sucked for a plethora of reasons, like they shouldn’t have sucked. Oil crisis, rapid need to change course on mpg with no experience doing so, what did you expect really? Japanese cars were more efficient because theyd been building small “city” cars for years. Those cars weren’t what Americans needed or wanted until the oil crisis.

      2. Oh yeah-after the Oldsmobeasts – they bought Plymouth Reliants which also blew engines at 30K

  4. The Detroit Three automakers have made it clear that they are content with the existing NAFTA-content rules.

    American-made components cost more! After the 2nd-round K-cars of the 90s and 00s, American car makers are finally producing competitive vehicles and restoring their heavily-tarnished image.

    Wouldn’t abolishing NAFTA and the tariffs be beneficial from a free-trade standpoint?

    I truly think that the Big Three would continue producing the entry-level vehicles in Mexico even in a completely free market. China’s labor might be cheaper, but that’s a long way to transport a completed vehicle, and Mexico already has the manufacturing facilities and workers.

    International and American-made goods have a huge price discrepancy. Compared to that, the 2.5% tariff is nothing; if they truly had to buy half of the components from the US market, it would drive up the cost of the vehicles, and make them much less competitive.

    Mexico is getting all the assembly plants because of cheap labor and twice as many tariff-free agreements as the US. The Honda and Toyota plants in the US are quite competitive, and employee satisfaction is excellent.

    Toyota:

    Built in America 56%
    Built in Canada 25%
    Built in Mexico 6%
    Built outside N.A. 13% (Mostly Lexus Models)

    1. “After the 2nd-round K-cars of the 90s and 00s”

      Not sure what you mean here by “2nd round” but the last k based cars were minivans in 1995. Which didn’t suck. Ok they sucked a little, but they were ok for what they were.

      1. They were definitely better. I actually drove a late 80s/early 90s Dodge Caravan with a half-dozen people in it through the Appalachian mountains, and other than some understandable brake fade, it was a really excellent car to drive. The steering was tighter than any German car, and it was pushing 20 years old at the time. Caravans did popularize the minivan, I suppose.

    2. Wouldn’t abolishing NAFTA and the tariffs be beneficial

      Duh, you get rid of the tariffs & NAFTA’s superfluous! NAFTA’s about exemptions to the tariffs.

      1. I guess it’s certainly better than the duties.

  5. One of the worst things about government interference in markets is how capricious and arbitrary it is, and how much it is susceptible to the whims of the Top.Men. Even if there were no elections every 2/4 years, dictators also change horses mid-stream for no particular reason.

    Whereas markets react to society, culture, and the vagaries of fashion,, sometimes abruptly, but always in small enough lurches that industry can keep up.

    Of course, as usual, when people can’t keep the government out of their hair, they do their damnedest to make sure their competitors get it even gooder and harder, with the unfortunate side effect of legitimizing and expanding government.

  6. “The North American Free Trade Agreement (NAFTA) survived another round of negotiations…”

    Instead of penning a mindless article, perhaps a bit more understanding of the word “negotiation”. Until we see a draft proposal, demands from any party are just that…demands. They may not even want them, but use them to put pressure on the opposing party for flexibility on other sticking points. I only have enough understanding of NAFTA to know that it is an absurdly complex web of negotiated caps and tariffs for every industry under the sun. Sadly, it appears Reason authors don’t even understand that much.

  7. NAFTA includes the ISDS clause (it stands for “Investor-State Dispute
    Settlement” or “I Sue Democratic States”) which requires each of the
    three countries to give foreign companies more rights than its own
    citizens.

    The economic effects of this treaty are bad enough — increased
    business profits at the expense of lower wages — but ISDS is worse
    because it directly attacks democracy. If we can’t change NAFTA to
    get rid of these two forms of harm, we should get rid of it entirely.

  8. Trump should have been President when I worked at J&L Aliquippa works. Instead of teaching English in Taiwan, I’d be retired by now.

  9. I always LOL at the dissing on older American cars. They had their pros and cons, and there were a lot of total shit cars, mostly during the 70s and 80s… But anybody who thinks old small block v8s were pieces of shit that didn’t last is insane. For their time they were amazing pieces of engineering. I’ve abused the hell out of my old Chevy 350 and it just keeps on ticking.

    Newer American cars are quite competitive even in the compact market. I think the snobbery from some people about Japanese cars is hilarious because it mainly traces itself back to a short period in the 70s/80s when SOME types of Japanese cars were legit better, but others were inferior even during that era. All the Japanese companies had their snafus too, from failing trannies to blown head gaskets etc. But that was always ignored. Nowadays it really depends on the exact model whether a Ford or Toyota will be better.

  10. As far as the actual topic, I don’t even know what there really is to do to improve our trade balance with Mexico. We’re at no tariffs either direction, so unless they’re manipulating things on their end through subsidies etc the truth is they’re just killing us because they’re cheaper on most stuff. With China there are “unfair” trade practices going on. I don’t believe that is the case with Mexico. Maybe tweaking a few things around the edges, or updating might help something, but I expect minimal changes and him walking away calling it a victory.

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