Following through with campaign promises, the Trump administration has set its sights on renegotiating the North American Free Trade Agreement (NAFTA).
While the administration says changing NAFTA will bring back automotive manufacturing jobs to the U.S. and reduce a trade deficit with Mexico, a Michigan-based industry research group says changing the more than two-decade-old agreement could cause more harm than good.
“The industry has been built looking at the whole region in an interrelated way,” Dave Andrea, executive vice president of research at the Ann Arbor-based Center for Automotive Research, told MiBiz. “Whether that’s looking at the talent pool for assembly labor, or looking at the cost structure in the supply chain, it’s built with the assumption that both people and product would flow freely across the U.S. and Canadian and U.S. and Mexico borders.”
Andrea helped author a recent CAR report detailing the effects a withdrawal from NAFTA could have on the industry.
For suppliers, renegotiating NAFTA and placing tariffs on components and vehicles produced in Mexico could severely upend the efficiency and cost effectiveness that’s been built into the automotive supply chain over the years, according to the report.
“NAFTA, which has been operating under the industry’s investment and sourcing strategy for decades here, is engrained in investment and sourcing decisions,” Andrea said. “The potential downside of looking at U.S. manufacturing for the U.S. market (only) is that starts you down the path of having duplicative assembly or component capacity in each country. It leads you down a path of being dependent on the U.S. economic cycles and U.S. demand for individual vehicles. That puts these plants at a greater risk.”
Automotive suppliers rely on open borders to ship components back and forth between facilities, and often multiple times before the product reaches final assembly, according to the report.
That’s true for Grand Haven-based GHSP, a division of JSJ Corp. A manufacturer of electronic pumps and shift-by-wire transmission components, GHSP regularly ships components between its facilities in Michigan and Saltillo, Mexico, said President Jeff Smith.
“Really, all of our plants supply each other,” Smith said. “Before we might move a program down to Mexico so we have better utilization out of that facility. But to have that product be shipped back into the U.S. doesn’t make a lot of sense if you’re going to pay a bunch of tariffs on it. From a make-versus-buy standpoint, as well as just taking a look at our manufacturing location strategy, (changing NAFTA) will have an impact on our plans going forward.”
While it remains unclear exactly what a revamped NAFTA agreement would look like or what tariffs would be levied on goods being shipped from Mexico, Andrea notes it’s equally uncertain if Mexico will impose similar tariffs on U.S.-made goods.
In addition to hampering supply chain efficiency, changing NAFTA could put at risk U.S. automotive-related jobs if it stifles vehicle sales and leads to fewer components being shipped to Mexico, according to CAR.
The CAR report estimates that a 35-percent tariff could cut U.S. light vehicle sales by 450,000 units as the cost of cars imported from Mexico increases. Ultimately, CAR projects that upwards of 31,000 U.S. jobs could be affected, as 40 percent of the vehicles imported from Mexico contain U.S. components.
For its part, GHSP will move forward with plans at its Mexican operations in the near term, despite the potential fallout from renegotiating NAFTA.
“We’re still continuing to invest in our Mexico facility at this point,” Smith said. “We have new launches that are taking place there, but you do have to be a little cautious not knowing what the final outcome might be.”