Why Trump Tariffs on Mexican Cars Probably Won't Stop Job Flight

[Ubiquitous]

President-elect Donald Trump says he wants automakers to build cars
they sell in the U.S at home or pay a hefty tax. On Tuesday he
criticized General Motors for building the Chevrolet Cruze hatchback
in Mexico. And during the campaign, he called for a 35 percent
tariff on autos produced south of the Rio Grande. But it may be more
free trade, not tariffs, that would help the U.S. keep some factory
jobs from moving south.

After Trump criticized GM, Ford said it would scrap plans to build a
$1.6 billion plant in Mexico and build its Focus compact car at an
existing facility there. Despite that, U.S. automakers Ford, GM and
Fiat Chrysler are planning to manufacture almost 1 million more cars
in Mexico by 2022, according to LMC Automotive, while building half
a million fewer cars in the U.S. They're not alone. Over the past
five years, automakers have rushed to build factories in Mexico. The
largest car companies have announced at least $22 billion in
investments and about 25,000 jobs at new or expanded plants in
Mexico by 2019. And that’s just the jobs that have been made public.

Cheaper labor is only one reason Mexico has seen a surge in new-car
production. While the country’s low wages have been the big
attraction, one of its key advantages is that it has trade
agreements with 44 countries, giving automakers access to half the
global car market tariff-free. The U.S. has similar trade deals with
just 20 countries, which make up 9 percent of global car sales,
according to the Center for Automotive Research in Ann Arbor,
Michigan.

A GM spokesman said most of the Mexican-built Chevy Cruze hatchbacks
Trump targeted on Tuesday are exported overseas. Many of the new
plants opening in Mexico are producing small SUVs and compact cars
such as the Cruze that are more popular with buyers in South America
and Europe. That means, that for Trump to get jobs flowing back into
the U.S., he might be better served seeking the kind of open market
that Mexico has created.

"It’s pretty ironic that what makes Mexico successful is free
trade," said Kristen Dziczek, an analyst at CAR. "You can look at
the new investment that has gone into Mexico and while a huge
portion is for the U.S., they are selling a lot elsewhere, too."

Ford spokesman Karl Henkel said that Ford's decision to build its
Focus compact and Fusion sedan in Mexico "is not solely tied to
whichever agreement has the lowest tariffs." He did say that low
cost is important, especially in Mexico, but location of the plants
relies on multiple factors.

To get a better sense of Mexico’s advantage, consider a $25,000
midsize sedan built and shipped in Mexico with one in the U.S.

Automakers can pay Mexican workers a lot less. Total hourly
compensation in the motor vehicle manufacturing sector is about 80
percent less for Mexican workers compared with that for U.S.
workers. Considering assembly time for a typical midsize car, an
automaker can save $600 per vehicle on labor costs.

Infrastructure in Mexico lags behind the highway and rail network in
the U.S., so it actually costs automakers $300 more per car in
additional shipping expenses to produce the vehicle in Mexico and
ship it to Europe, and an extra $900 to ship it to the U.S.

That means, even after paying significantly less on labor, a car
company is walking away with wage savings of only $300 per car—a
fraction of what it costs to build and ship in the U.S. The bulk of
the savings are tied to Mexico’s trade agreements and cheaper parts.

Automakers can save $1,500 per car on cheaper Mexican auto parts.
Certainly, a lot of those savings are tied to the lower wages
workers in Mexico are paid. But some of these parts are imported to
Mexico tariff-free from countries in Europe and Asia, particularly
for the foreign automakers who are increasingly investing in Mexico
instead of the U.S. Since the U.S. doesn’t have as many free trade
agreements, some of the automakers would pay extra for some of those
parts if they made those models in the U.S., said Bernard Swiecki,
senior analyst at CAR.

The same company selling that mid-sized car saves $2,500 per vehicle
that it builds in Mexico and ships to Europe because the U.S.
doesn't have a trade agreement with the EU. That's more than it
saves in parts and wages once shipping costs are figured in.

So, in total, an automaker saves more than $4,000 by building and
shipping a car from Mexico to Europe instead of from the U.S. If
Trump could match those trade deals, he would erase an average
$2,500-per-vehicle cost advantage over American-made midsize cars.

The cost advantages from Mexico’s trade agreements are adding up.
Automakers avoided about $770 million in tariffs in 2014, the most
recent year for which data are available, that they would have paid
had their exports come from the U.S. rather than Mexico.

Make no mistake, the majority of Mexico’s auto exports are still
sent tariff-free to the U.S. and Canada under Nafta. Mexico sends 2
million cars a year to the U.S., more than half its total
production. But those shipments are making up less of Mexico’s total
exports. By 2018, 28 percent of Mexico’s production will be exported
to countries besides the U.S. and Canada, up from about 18 percent
in 2015.

Less than 10 percent of U.S. production is sent offshore because
American plants tend to make more expensive vehicles that car buyers
in emerging markets can’t afford, and because Mexico’s trade deals
have increasingly made the country a center for export.

GM will send more than half of the new Chevrolet Equinox SUVs built
at a plant in Ramos Arizpe, Mexico to markets in South America, the
Middle East and Asia, according to a person familiar with the
matter. Similarly, Audi opened a brand new plant in Mexico to build
its Q5 luxury SUV in September, with executives talking up the
country’s free trade deals when it announced the start of
production.

“In some ways it makes no sense to bash Nafta,” said Swiecki. “You
could abolish the agreement but that won’t abolish the other
agreements that Mexico has with other countries.”



--
Obama acting tough at this point is like an athlete finally trash
talking out the team bus window as it leaves the stadium parking
lot.

[Gronk]

[Ubiquitous]

Nonresponse noted. get back to us when you have a real argument to make.