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U.S. Automakers and the Lure of Mexico
Trade was the big economic issue of the 2016 presidential campaign that propelled Donald Trump to the White House; thus far, he has taken on countries and companies that many feel have conspired to enrich themselves at the expense of the American worker. While there hasn’t been collusion per se, there have been efforts to gain U.S. manufacturers, and those efforts have been made easier with certain trade deals.
The North American Free Trade Agreement (NAFTA) was implemented January 1994, which happened to be the last year America ran a trade surplus with Mexico. The United States enjoyed trade surpluses with Mexico, peaking in 1992 with $5.4 billion, $1.7 billion in 1993, and $1.3 billion in 1994.
In 2015, the U.S. ran a $60.7 billion trade deficit with Mexico.
The nuances of NAFTA have advantaged Mexico, although it’s clear that the overall economic activity has surged on both sides of the border. However, there are other advantages that Mexico has as a manufacturing hub.
Major Mexican Advantages:
Then there’s the issue of the Value Added Tax (VAT), which is applied at each level of production, and it currently adds approximately 16% to the cost of goods in Mexico. With Mexican and foreign companies manufacturing in Mexico, the VAT is rebated, making it a duty-free export into the United States.
Donald Trump’s advisors want that VAT loophole fixed. His Republican colleagues have discussed a Border-Adjustment Tax (BAT), which would really be more of an adjustment mechanism than a tax by reducing the advantages of imports from places like Mexico while mitigating U.S. taxes on exports. It remains to be seen how that moves forward.
The bottom line is that America is going to have to become more attractive for businesses with lower taxes and fewer regulations; even then, Mexico has major advantages. New trade deals will help, along with the intangible value that goes with hiring Americans and not having the Commander-in-Chief as a public adversary.
Automakers to Play Ball
During his interview with Neil Cavuto on Fox Business, Mark Fields, CEO of Ford, said there was no negotiation with the Trump administration over its announcement to abandon a proposed $1.4 billion manufacturing facility in Mexico. Fields said that decision was based on the lack of demand for small cars, which will still be produced in Mexico.
Mr. Fields did hint, however, that President -elect Trump might do the industry a favor on proposed Corporate Average Fuel Economy (CAFÉ) standards that would provide great economic relief to the industry. Currently, fleets are supposed to achieve 35.5 miles per gallon CAFÉ, but that number swells to 54.4 miles per gallon by 2025- a number not achievable even with the surge in technology and lightweight materials.
Of course, there are additional issues for the industry, which would be placed between the proverbial rock and a hard place if forced to choose to only build in America, including the fact that China alone has become a larger market. Consider Ford, it is investing $700 million in a new plant that will only create 700 jobs. It sounds as though a lot of robots and computers are going to be hired.
I do believe that Donald Trump’s efforts will improve manufacturing, and it’s going to take a combination of carrot-and-stick.
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