Pulling out of NAFTA could cost the U.S. economy more than 30,000 jobs in the auto sector alone, and lead to higher prices and less choice for American customers, an automotive research think-tank says.
A new report from the Michigan-based Center for Automotive Research (CAR) concludes president-elect Donald Trump's oft-repeated plan to tear up or renegotiate the North American Free Trade Agreement, and slap punitive tariffs of as much as 35 per cent on U.S. companies offshoring their production, would do little to spur U.S. jobs production, and in fact would likely lead to a sharp loss.
Trump has repeatedly told automakers to expand their U.S. production facilities instead of ramping up in Mexico or elsewhere, or they could face the consequences. But the report by CAR, which calls itself an independent, non-profit, research organization, suggests the reality of cross-border trade in the automotive sector sees Americans coming out ahead on virtually every front.
The theory that automakers are building plants outside the U.S. and axing American jobs as a result doesn't hold up, CAR says, in a world of globalized supply chains.
"Without NAFTA, large segments of the U.S. automotive industry would have moved to other low-wage countries in Asia, Eastern Europe, or South America," CAR said.
"The automotive industry enjoys many alternative locations that would provide ready sourcing options outside the United States."
The U.S. is a major market for cars, but pales in comparison to the potential in the European Union or China. Because of NAFTA, automakers consider all of North America to be a single market, which increases its heft on the world stage.
"The United States is currently the largest automotive market in terms of total sales value, and nearly every large global automaker or supplier is present here, but, should the United States pull out of NAFTA, that could change. Vehicle prices would increase, which — all other things equal — will cause the U.S. market to shrink," CAR said.
The report also notes that the notion of a "foreign-made" car is outdated, even in the U.S. According to the most recent data, more than 40 per cent of the components in the average car manufactured in Mexico last year came from the U.S. For so-called Canadian-made cars, the ratio is about 25 per cent, CAR said.
That's part of why U.S. car-related jobs tend to increase even when automakers expand facilities in Mexico or Canada.
"For example, overall U.S.-Mexico trade data show that, on average, a 10 per cent increase in employment at a Mexican affiliate operation leads to a 1.3 per cent increase in U.S. employment," CAR said, and "a 1.7 per cent increase in U.S. exports, and a 4.1 per cent increase in U.S. R&D spending."
Since the U.S. economy is so much larger than Mexico's, those small percentages add up to large numbers of real jobs. If a large company with more than 40,000 employees in the U.S. were to expand its small, 5,000-person plant in Mexico by 10 per cent, that would make the Mexican plant expand to 5,500 people.
But the knock-on effect of that ratio means that company would likely also add 500 new jobs in the U.S., too.
The CAR report noted most of the car factory expansion in Mexico in recent years isn't coming from U.S. companies anyway. Roughly 90 per cent of the new investment in Mexico since 2009 came from non-American automakers.
That's good news for Canada and the U.S., since there's an incentive to keep parts and other aspects of the automaking process close to those plants too.
"These global companies are transitioning production from their home regions to North America, and will increasingly rely on existing North American supply chains, given the logistical disadvantage of sourcing parts and components from overseas," CAR said.
And 80 per cent of the cars those Mexican factories produce end up being sold in the U.S.
Compelling U.S. automakers to shut down or at least stop expanding their Mexican plants won't create more auto-making jobs in the U.S., CAR concludes. A likelier outcome would be that Mexico produces just as many cars as it ever did — they just won't end up coming to the U.S.
"Mexico has free trade agreements with 45 countries other than the United States," CAR said. "Mexico has plenty of choices for sources of its manufacturing inputs."