After signing an order Monday abandoning the proposed Trans-Pacific Partnership, President Trump has set his sights on renegotiation of the North American Free Trade Agreement, a prospect that worries the automotive industry.
Trump laid out his strategy after being sworn in last week. In a post on the White House website, the administration pledges in a statement to negotiate “tough and fair” trade agreements with the goal of creating more U.S. jobs as a top goal.
“This strategy starts by withdrawing from the Trans-Pacific Partnership and making certain that any new trade deals are in the interests of American workers,” the statement says. “President Trump is committed to renegotiating NAFTA. If our partners refuse a renegotiation that gives American workers a fair deal, then the President will give notice of the United States’ intent to withdraw from NAFTA.”
Detroit’s Big 3 automakers — Fiat Chrysler Automobiles, General Motors, and Ford all either declined to comment or did not respond to e-mails seeking comment. The Auto Alliance, a lobbying organization for the industry, also didn’t offer a comment.
Automakers also have been racing in recent weeks to pull any plans they have for U.S. investments and job creation off the shelf and announce them in an effort to blunt criticism from Trump for investing in Mexico.
NAFTA, the free trade agreement between the U.S., Canada and Mexico, has contributed to a decline in U.S. manufacturing jobs, but it has led to massive automotive industry investment in Mexico and the growth of a supplier network there.
Nearly every automaker — both foreign and domestic — has built new plants in Mexico in recent years. Mexico has surpassed Canada in annual vehicle production.
Reversing those investments to build new plants in the U.S. would take years. Meanwhile, a large border tax, such as the 35% tariff that Trump has threatened, would cause the price of many cars and trucks sold in the U.S. to soar. It could lead to a decline in industry sales and lead a steep decline in profits for automakers.
“The new administration is suggesting a reversal in trade policy of a magnitude that hasn’t been seen in decades, possibly since the 1920s,” said Hoyt Bleakley, an associate professor of economics at the University of Michigan. “A sudden increase in trade costs is a recipe for a slowdown, maybe a recession, as the higher costs disrupt the supply chain.”
Last week, the Center for Automotive Research in Ann Arbor issued a study that suggested scuttling NAFTA or imposing a massive border tariff could lead to U.S. job losses and could cause automakers to move to other low-cost countries for vehicle production rather than building new plants in the U.S.
The Ann Arbor-based research organization estimates that a 35% tariff on light vehicles imported from Mexico would quickly lead to a decline of 450,000 cars and trucks in the U.S. because of higher prices, hurting U.S. dealers and automakers.
It also would lead to the loss of at least 31,000 U.S. jobs because of the volume of parts that are made in the U.S. and shipped into Mexico.
“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 Center for Automotive Research said.
Fiat Chrysler CEO Sergio Marchionne said last week that a 35% border tariff could force the automaker to stop producing cars in Mexico..
“It’s possible that if economic tariffs are imposed … and are sufficiently large, it will make production of anything in Mexico uneconomical and we would have to withdraw,” Marchionne said. “It’s quite possible.”
Marchionne also added that the automotive industry needs clarity from the Trump administration on what its official trade policy and trade agreements will be.
“I think we will adjust whenever the rules get changed, if they get changed. We have no choice in this. We are not policy setters,” Marchionne said during a news conference at the North American International Auto Show in Detroit. “I am not sure exactly what the rules are. Let’s wait.”
Scott Keogh, president of Audi of America, said last week that a border tariff would not hurt the German automaker as much as some other automakers.
Audi decided five years ago to build a $1.3-billion factory in the south-central Mexico town of San Jose Chiapa to make its Q5 SUV.
“This plant … is a global plant. It makes cars for the entire world,” Keogh said. “So, there is only one place to get a Q5 and that’s (a Q5) made in Mexico. And it goes to Africa, and South America and Europe and all over the world. The car used to be made in Germany, in fact, and now it’s made in Mexico.”
Revealed last week at the Detroit auto show, the new Q5 is scheduled to go on sale in the U.S. by spring.