Withdrawal from NAFTA would cost U.S. jobs, study finds

DETROIT (Jan. 17, 2017) — President-elect Donald Trump's vows to renegotiate the North American Free Trade Agreement (NAFTA) and pursue more protectionist trade policies likely would have a negative effect on the U.S. auto industry, a new study reveals.

NAFTA has been a net positive for the industry and for the U.S. economy as a whole, supporting high-wage jobs and making North America a more attractive place to do business, according to a study released this month by Ann Arbor, Mich.-based Center for Automotive Research (CAR).

Withdrawing from NAFTA and implementing a 35-percent tariff on imported vehicles and parts, as Mr. Trump repeatedly has pledged, would cause vehicle prices to spike, the U.S. market to shrink and at least 31,000 U.S. auto manufacturing jobs to be lost, according to the CAR study.

"Any move by the United States to withdraw from NAFTA or to otherwise restrict automotive vehicle, parts and components trade within North America will result in higher costs to producers, lower returns for investors, fewer choices for consumers and a less competitive U.S. automotive and supplier industry," the authors wrote in the report, funded by the Alliance of Automobile Manufacturers (AAM) trade group.

Mr. Trump, who will be sworn into office on Jan. 20, ran for president in part on a platform to renegotiate or withdraw from trade agreements such as NAFTA, which he has called a "disaster," and bring back American manufacturing jobs lost to globalization, productivity gains and technological advances.

The president-elect has not toned down his fiery trade rhetoric since his election victory, frequently singling out automakers on Twitter for selling Mexican-made vehicles in the U.S. and threatening to slap them with a 35-percent tariff.

In response, auto makers, including each of the Detroit 3, have announced plans to invest in U.S. plants, though they each insist Mr. Trump's repeated threats are not the primary motivation for those investments.

Should Mr. Trump follow through on his trade promises, the final results on jobs could be the opposite of what he intends, the report found. For instance, a 35-percent tariff on vehicles imported from Mexico would result in the loss of at least 6,700 North American assembly jobs and 450,000 units of U.S. auto sales, according to the CAR study.

Because Mexican-made vehicles are made of about 40-percent U.S.-made parts on average, and American-made vehicles are made of about 12-percent Mexican parts, about 20,000 U.S. parts manufacturing jobs and 11,000 U.S. assembly jobs could be lost as a result, CAR said. And those job losses could multiply due to other factors, it said.

For instance, "job losses would not be evenly distributed and would have an impact on individual automakers' and suppliers' capacity utilization, which could lead to plant closures and broader job impacts," CAR said.

Simply bringing manufacturing jobs back from Mexico after withdrawing from NAFTA also would not be as simple as Mr. Trump might imagine it, according to the report.

About 55 percent of Mexican-made vehicles were exported to the U.S. in 2016, according to IHS Markit. To make up for those lost vehicles in the U.S. market, auto makers likely would choose to supply the U.S. with small cars from plants outside the NAFTA region, CAR said.

Doing so would require the 10 largest auto manufacturers to add about 1 million units of production capacity to the U.S. to produce other models. In theory, that could add an estimated 22,200 jobs.

However, since there is very little open capacity at U.S. auto plants, auto makers would be required to invest as much as $6.5 billion to build new capacity, according to CAR.

Additionally, "Canada serves as an obvious likely replacement source of capacity," the report reads. "In fact, [the] current exchange rate makes Canadian labor costs lower than those in the United States."

Furthermore, just 48 percent of Mexican light-vehicle production is by the Detroit 3 auto makers. Because of that, "foreign manufacturers may have fewer incentives to move production currently located in Mexico to the United States," the report reads.

U.S. suppliers also could be threatened, as the U.S. exported $22 billion in parts to Canada in 2015 in addition to $20 billion to Mexico.

"The suppliers that would potentially move back to the United States to follow relocated vehicle production would be few — mainly those tied to the just-in-time plants and jobs manufacturing other bulky, fragile, or otherwise difficult to ship parts and components," CAR said.

Tariffs also would have a negative impact on U.S. dealers, according to the report, saying dealer employment could be negatively affected if automakers curb production or vehicle imports as a result.

While acknowledging flaws with NAFTA — including issues with labor and environmental standards — the report's authors argue that NAFTA has been a positive force for keeping auto manufacturing jobs in the U.S. that otherwise would have gone elsewhere.

"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. "By producing cheaper automotive parts and components on the 'near shore' in Mexico rather than truly 'off-shore,' Mexican automotive plants helped sustain a competitive automotive industry across North America."

The U.S. exported about $419 billion of goods to Mexico and Canada in 2015, about 16 percent of which was automotive-related, according to the report.

"If the U.S. leaves NAFTA, companies in Mexico and Canada may seek alternate, more affordable places to purchase these goods, such as China, India, and other regions with large, international U.S. competitors," the report reads.

A request for comment from the Trump presidential transition was not immediately returned.

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John Irwin is a reporter with Automotive News, a Tire Business sister publication, where this report appeared initially