Wards Auto: Dealing with the NAFTA Math

January 24, 2017 - posted by Rachel Bonello

Canada, the U.S. and Mexico have truly become one integrated and connected market over the last two-plus decades. It makes no economic sense to turn that market off.

No matter where you sit on the political spectrum, everyone can agree the Trump presidency is likely to come with some big changes for American businesses.

For the automotive industry, those changes could be particularly significant. They include potential paradigm shifts in U.S. international relations, as well as the potential for modified trade agreements.

Those agreements, especially those pertaining to Michigan automotive companies and suppliers shipping overseas, have become an integral piece of the overall business model for OEMs and other automotive companies, many of which have built the infrastructure and operational mechanics of their supply chains around those international realities.

President Trump has said he will try to renegotiate NAFTA, perhaps even pulling the U.S. out of the three-nation trade agreement. Such a development would cause some very problematic issues for automotive companies with plants and suppliers in Canada and Mexico.

Automakers with vehicles being made in Mexico that need to be delivered back to the U.S. would be especially hard hit. Trump also is taking the U.S. out of the Trans-Pacific Partnership, a 12-nation trade agreement signed last year that helps keep Detroit Three products made in the U.S. competitive in overseas markets.

Automotive companies and suppliers (and the transportation logistics professionals they rely on to maximize the efficiency of their complex supply chains) should be giving serious thought as to how Trump’s decisions could impact the industry, and what they will need to consider going forward as they look at modifying their logistics and supply chain operations to accommodate proposed or potential changes.

Wins and Losses

Trump famously said during the campaign that America would be winning again, suggesting to crowds they would win so much they would get “sick of winning.”

Unfortunately, if NAFTA is disrupted or eliminated, everyone would lose. Such a move would be devastating (perhaps even crippling) for the American automotive industry and, ultimately, the cost and disruption would be passed down to consumers.

Automakers such as Nissan and Volkswagen have made huge investments in Mexico, and they have insisted that many of their suppliers source locally. In turn, those OEMs have made massive long-term investments to build up the infrastructure to fulfill that supply dynamic. Additionally, because goods flow back and forth across international borders within the production process (just within our own transportation and logistics business, we manage tens of thousands of shipments every day that go into and out of Mexico), a significant change or dissolution of NAFTA would not put a kink in automotive supply chains; it would sever them completely.

Penalizing an automotive supplier that, for example, sends the various components of a wiring harness to its Mexican facility for a labor-intensive assembly process would be problematic.

Timing and Tensions

The timing of any possible changes is something else to consider, and it’s here where I see some room for optimism. NAFTA has been in place for more than 20 years, but the agreement had been in the works for decades before its 1994 implementation.

Any legislation to unravel and untangle the connections that have been forged under NAFTA will be inherently complex and contentious, and sorting out the details likely would be time-consuming. The administrative, legislative and logistical complexity of the trade agreement – and the steps that would have to be taken to extricate the U.S. from it – present an array of challenges and issues that would need to be resolved.

Realistically, even if Trump and his administration push hard, I don’t see anything happening within the next 24 months.

Alternative Possibilities

I am hopeful this won’t happen. And, frankly, I have a hard time believing it could happen. I suspect there is more posturing and saber-rattling going on here than serious policy proposals, and I expect that the benefits of allowing commerce to flow freely across the continent will override any political calculations.

That said, industry leaders, think tanks and professional forums are (wisely) already coming up with contingency plans and game-planning alternatives in the event of a worst-case scenario.

In the meantime, it would not be surprising to see these companies actively work through political and legislative channels to slow any repeal effort. OEMs and suppliers that have invested billions to establish production facilities in Mexico, on the assumption that NAFTA would be in place, could pursue legal remedies, perhaps even suing the U.S. government.

One possible outcome, short of a full repeal, would be making some changes to NAFTA. Some of the loopholes loosely monitored today could be closed or at least enforced with more vigor. For example, the practice of importing parts from low-cost countries into Mexico and then making modest changes to those parts to qualify them as Mexican in origin. There are hard and fast rules that govern how much value has to be added for a product to be labeled as Mexican, but existing laws could be enforced more rigorously.

Another way NAFTA could be changed in a positive manner is to alleviate U.S. driver shortages and protect against inflating transportation costs by allowing Mexican trucking companies to operate here in the U.S. NAFTA provides for this, but it has yet to be implemented. Common complaints about safety and standards have been part of regular objections from interest groups and influential parties here, but recent studies have comprehensively debunked those notions.

The bottom line is that Canada, the U.S. and Mexico truly have become one integrated and connected market over the last two-plus decades. It’s now a part of our trade DNA. It makes no economic sense to turn that market off. It’s also critical to note the U.S. could not physically bring automotive manufacturing jobs back, because the pool of skilled labor required to make that happen simply does not exist today.

If NAFTA is repealed, the cost of virtually everything we buy – from cars to food and beverage – would go up, and consumers would get the short end of the stick. Frankly, the prospect seems so absurd that many industry professionals do not take it seriously. They simply do not believe that such a puzzling and costly step backward ever would happen.

For the sake of businesses and consumers across North America, I sincerely hope they are right.

 

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