Trump’s NAFTA revisions — designed to help the US auto industry — could have the opposite impact

Sep 6, 2018

In Michigan, the North American Free Trade Agreement has been a source of controversy for more than 25 years. Many argue that NAFTA has allowed American car companies to compete in a hyper-competitive global market. Others say the trade deal, which took effect in 1994, bled auto jobs from the US to Mexico.

This week, talks to salvage the 24-year-old trade deal resumed between the US and Canada amid tensions between President Donald Trump and Canadian Prime Minister Justin Trudeau. The US and Mexico reached an agreement last week to revise the deal.

Trade negotiators from the three North American nations have been meeting for more than a year now, attempting to update the agreement, with threats all the while from President Trump to simply abandon NAFTA entirely if the US can’t get a better deal. The deal currently being floated, though, has many in the automotive world feeling shaky, worried that changes could upset the flow of auto parts crisscrossing the globe. 

Consider the General Motors' factory in Detroit, a plant so big that you could fit 71 football fields under its roof. It’s so big that it actually spans two cities: Detroit and Hamtramck.

Frames of Chevrolets, Buicks and Cadillacs slowly roll down assembly lines that weave back and forth through the sprawling factory. “If you were to stretch our track out into one big, long line, it’s actually 16 miles of conveyor,” says Robert Walega with GM's Detroit-Hamtramck communications team.

It takes a car about three days to navigate from start to finish, with people and machines working side by side. “And as you can see up ahead, we’ve got one of our autonomous vehicles that are actually transporting parts around the plant,” says Walega, pointing out one of many driverless carts navigating the factory floor.  

GM wouldn’t comment on the ongoing NAFTA talks for this story, but it has warned against President Trump's threats of global tariffs on imports of cars and car parts. The auto giant agreed to open its Detroit-Hamtramck factory to show off the complexity of 21st century supply chains.

The sum of 2,000+ parts

When the squeaky new car tires roll off the line in Detroit, most of us casually call them “American-made” Buicks or Cadillacs. But the car is really the sum of its parts.

“If you look up at the front of the car there, that white piece of paper there is what we call a manifest. That manifest has every part that would be needed,” says Walega, estimating that more than 2,000 parts are listed. The components come from across the globe. (GM wouldn't say where they specifically get their parts.) 

“I actually think that number's low, the 2,000,” says Julie Fream, the CEO of the Original Equipment Suppliers Association, a trade group based in Michigan that represents about 500 automotive suppliers in North America.

She says that estimate — 2,000 parts in a car — is low because GM is getting some preassembled modules. Fream says when you factor in every little nut and bolt, “It’s over 10,000 parts, well over 10,000 parts that go into a vehicle.”

And remember, it goes both ways: US auto parts are used in foreign-built vehicles as well, particularly in the US and Mexico.

Costlier cars, fewer jobs?

If the Trump administration gets its way with a revised NAFTA, 40 percent of a car built in North America would need to come from a North American country where workers earn about $16 an hour; in other words, from the US or Canada. Could this change drive more work to the US?

“I don't think it's that simple,” says Fream “As you increase the amount of content, yes, you will potentially, short term, look at increasing the jobs, but it may also increase the cost.”

A cost that ultimately gets passed along to consumers in the form of higher car prices. 

The Trump administration also wants North American-built vehicles to have more parts from Canada, the US, and Mexico overall — at least 75 percent, up from the current 62.5 percent requirement in order to qualify for NAFTA preferences — and for at least 70 percent of the core parts to be made from more North American steel and aluminium.

But let’s say a Ford built in Mexico, or a Buick made in Detroit, doesn’t meet those thresholds. Then, the automakers would have to pay a small tax. Kristin Dziczek with the Center for Automotive Research in Ann Arbor says automakers would probably just pay it.   

“It is much cheaper to pay 2.5 percent than it is to invest in new plants, expand capacity,” says Dziczek. “To do all the things you would need to do to jump through these hoops is in many cases more costly than paying 2.5 percent.”

But all those small extra costs would add up quickly. Dziczek estimates that some American-brand name vehicles built in Mexico and Canada could cost $470 to $2,200 more.

Add in President Trump’s repeated threats of tariffs on imports of cars and car parts — up to 25 percent — and Dziczek says the result could be 1.2 million fewer vehicles sold in the US. Those vehicles, especially cars from Canada and Mexico, would have been filled with a lot of US-made parts.

“And that result would be about 200,000 fewer US jobs,” says Dziczek

If you try and force more manufacturing into the US, then the US needs to be ready with both raw materials and the workers. About 900,000 people in the US work directly in motor vehicle parts, but Julie Fream says they’re already having difficulty finding enough tradespeople, technicians and engineers to work in the US as it is.

“So the challenges of, I’ll say, ‘bringing jobs into the US,’ we don’t have the people to do the jobs we have now,” says Fream. “And so we need to think very carefully about the perhaps unintended consequences of what we're trying to do here.”

Still, many say something needs to be done. The United Automobile Workers put out a statement last week saying NAFTA has had a devastating impact on workers for 25 years and they remain committed to re-working the trade agreement. But the statement also had a note of caution, saying “As always, the devil is in the details.” (A spokesperson with the UAW turned down interview requests for this story, saying via e-mail that they rarely comment on ongoing policy proposals “until there is something concrete.”)

And there are still a lot of unknowns about a renegotiated NAFTA. What would the final text say? Would Canada be part of a new pact, or would it just include the US and Mexico? And would Congress give the necessary approval for any new deal?

Dziczek says she’s relieved that more than a year of uncertainty looks to be ending soon. But she says a “new NAFTA” doesn’t fill her with optimism.  

“I’ve said it over and over again, it’s sort of 'dodged a bullet' situation, that it could’ve been so much worse,” says Dziczek. “This we can live with, this is not so bad. But I don’t think any Main Street should be having a big parade for all the jobs that are coming home because there’s not a clear set of positives for any auto-producing region in the US.”


From PRI's The World ©2017 PRI