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The Promise and Threat of Trump’s Tariff on Mexican-Built Autos

Will carmakers build new U.S. assembly plants?

Will cars and SUVs assembled in Mexico and sold in the United States pay for the "beautiful wall" on the border? That question has haunted U.S. and foreign automakers that invested heavily in the North American Free Trade Agreement since before President Donald Trump's inauguration. The flip side for automakers is they are in for some "midterm review" relief under Trump from the 54.5-mpg 2025 Corporate Average Fuel Economy standards set early in the Obama administration.

Negating NAFTA to bring back U.S. factory jobs was a key plank in Trump's campaign platform. What would it mean to the auto industry if a tariff of as much as 35 percent replaced NAFTA?

"Tearing up NAFTA and putting up barriers would not benefit the U.S. or Mexico," says Sam Fiorani, AutoForecast Solutions' vice president for automotive forecasting. "A healthy balance of focus on the U.S. economy, while still playing in a global market, has to be the goal of any new trade policy."

Between parts and assembly plants, OEMs have 20 facilities in Mexico, most of which export cars to the U.S. and elsewhere. Fourteen opened in 1994 — the year the U.S., Mexico, and Canada signed NAFTA — or later. BMW and Toyota plan to open new Mexican plants in 2019.

In 2012, General Motors, Ford, and Fiat Chrysler produced 1.5 million vehicles in Mexico, compared with 5.4 million in the U.S. and 1.4 million in Canada, according to LMC Automotive as reported in the Center for Automotive Research's July 2016 study, "The Growing Role of Mexico in the North American Automotive Industry."

By 2016, the numbers grew to a projected 1.6 million in Mexico and 6.5 million in the U.S., and production slid to 1.3 million in Canada. LMC projects the Detroit Three in 2022 will build 1.8 million in Mexico, 6.6 million in the U.S., and less than 1 million in Canada.

The 1.6 million GM, Ford, and Fiat Chrysler vehicles built south of the border last year represent less than half of Mexico's total production. European and Asian automakers also have invested heavily in Mexico since NAFTA, and because the country has a number of individual free-trade agreements, many are exported to markets outside of NAFTA.

Automakers save about 80 percent on assembly compensation in Mexico versus the U.S., CAR's study says, and that was before Trump's vow to quit NAFTA resulted in a plummeting Mexican peso, which made factory production there even cheaper and more attractive. In this pre-election, pre-peso-drop study, CAR estimates that a Ford Fusion is $1,200 cheaper to produce in Mexico than it is in the U.S. for U.S. sale, and a Ford Mondeo is $4,300 cheaper to produce in Mexico than in the U.S. for European sale. Both figures include higher transportation costs. However, Mexico's advantages aren't limited to lower wages and free-trade agreements.

"Mexico offers workforce development and training programs and other aggressive development incentives," CAR says. "At the federal level, Mexico is pursuing multiple coordinated strategies to support and grow a strong manufacturing base, and many of these initiatives aim to address current weaknesses in the country's value proposition for manufacturing industries."

These efforts are about to hit a wall. Add up LMC Automotive's projections for Detroit Three NAFTA production, and you'll notice they equal 9.4 million units for 2016 and 9.2 million units for 2022. Even before last November's elections, there was consensus among analysts that U.S. sales peaked in 2015 and 2016.

"Even before the election, in the third quarter of 2015, we forecast a slowdown in Mexican production expansion," says Bernard Swiecki, senior automotive analyst for CAR's Industry, Labor & Economics group and co-author of the NAFTA study. "There's no need to add capacity for a flat market." Shutting down NAFTA doesn't mean building new factories in the U.S., he says, because most automakers operate other low-cost assembly plants in countries such as Poland, Serbia, Hungary, Slovakia, and Thailand.

Although Mexican plants can export vehicles to other markets, U.S. factory workers, especially those working for parts suppliers, would face even more risk of losing jobs post-NAFTA.

"The average Mexican-produced model has 40 percent U.S. content," Swiecki says.

Capitol Hill Republicans have been pushing an alternative called the border-adjusted tax. It would tax goods coming into the U.S. at 20 percent, but exports from U.S. factories would be exempt from U.S. taxes. No doubt American and foreign automakers would prefer this free-trade alternative, but it remains to be seen whether our strong-willed president is ready to compromise on a key campaign promise.

Mexico has 21 auto/light truck assembly plants operating, or opening for operation this year:

  • 14 of these plants opened in 1994 or later. NAFTA took effect in 1994.
  • Among the seven plants operating before NAFTA are Ford's Cuautitlan plant and Volkswagen's Puebla plant, both opened in 1964.
  • Among the 21 is the Mercedes-Infiniti COMPAS factory, scheduled to open in Aguascalientes this year.
  • Two more, Toyota Motors' Guanajuanto plant, and BMW's San Luis Potosi plant, are scheduled to open in 2019.
  • In addition, there are four Mexican plants producing heavy duty trucks, two of them Daimler's Freightliner brand and one Navistar plus one PACCAR factory.

Largest assembly plants are:

  • VW Puebla (opened 1964): Golf, Jetta, Beetle (the sole global source) and the new Tiguan.
  • Nissan Aguascalientes 1 (1992): Sentra, Versa/Versa Note and non-U.S. imports Micra/March, and Kicks.
  • Ford Hermosillo (1986): Fusion, sole global source for Lincoln MKZ, Focus to be added in 2018.
  • General Motors San Luis Potosi (2008): Chevrolet Trax, non-U.S. import Aveo, future source of Chevy Equinox (with Ingersoll, Ontario) and GMC Terrain.
  • Nissan Cuernavaca (1966): NV200/Chevy City Express, and non-U.S. imports Nissan D23/NP300 pickup, Tsuru, Tiida, Renault Alaskan pickup.
  • FiatChrysler Toluca: Dodge Journey (sole global source), Fiat 500 (assembled with engines built in Dundee, Michigan).
  • COMPAS Aguascalientes (2017): Sole source of next-generation Infiniti QX50, and small Mercedes-Benz modes starting in 2018.
  • Hyundai Monterrey: Accent, Kia Forte and Rio.

SOURCE: AutoForecast Solutions