Automakers must be enticed to keep jobs within borders, not just taxed
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The Detroit Three automakers were in Washington, D.C. again last week, and the contrast between their last high profile visit couldn’t have been more stark.

Instead of appearing as a result of the Great Recession with concerns of automotive manufacturing viability, they were in town to discuss how to bring more jobs back to the U.S. with the backdrop of back-to-back historic sales years. 

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President Trump tweeted out his desire for the meeting and the auto industry in general: “I want new plants to be built here for cars sold here!”

If only it were that simple.

The auto industry, perhaps more than any other, is a global industry. A large, interconnected hive of vehicle manufacturers, suppliers, dealers, and finance companies all with the desire to "move metal". 

As with most global industries, there is a desire to achieve cost efficiencies, primarily by specializing in the most productive and lowest total cost of production locations. 

This has led to a diaspora of sorts for various components within the industry with specialization in specific regions and countries. The end result has been positive for the U.S. consumer, as they have access to a large number of vehicles at a variety of price points. 

According to data from the International Trade Administration for 2015, the last full year of data available, the U.S. imported 8 million and exported 2 million light vehicles. 

When the North American Free Trade Agreement (NAFTA) went into effect in January 1994, it created a free trade zone within North America and gave automotive assemblers and suppliers a tariff free option to arbitrage the automotive assembly and supplier markets. 

Again, according to the International Trade Administration, currently, just over 50 percent of all new passenger vehicles imported into the U.S. for sales come from Canada or Mexico.

From a monetary perspective, that’s almost $80 billion in vehicle value coming into the U.S. from just those two countries. On the export side, approximately 51 percent of new passenger vehicles from the U.S. go to Canada and Mexico, but for nearly $24 billion. 

This overall sizeable trade deficit for finished vehicles could be what is motivating President Trump to push companies to build what they sell in the U.S. 

On the campaign trail, Trump spoke often about NAFTA, frequently discussing the imposition of a 35 percent tariff on vehicles imported from Mexico. So far, President Trump hasn’t taken his focus off of NAFTA and has stated his desire to renegotiate it.

So what does this mean for the highly connected industry described above? Several variables are at play that may impact any potential changes to NAFTA and auto investment in the U.S.

The U.S. is a member of the World Trade Organization (WTO), so there will be limits to taxing specific countries. Large tariffs would have the potential to negatively impact a highly-connected global industry and raise prices already at historic highs.

For U.S. consumers, some estimates forecast price rises of around $2,000 to $2,600 per vehicle. The decline in auto manufacturing jobs isn’t likely to be abated by a change in trade policy alone.

Productivity in plants has increased. The U.S. produced 12 percent more vehicles with 19 percent less employees in 2016 compared to 1993, based on data from PwC’s Autofacts and the Bureau of Labor Statistics.  

Auto companies have been investing heavily in Mexico recently because of its numerous free trade agreements (they have deals with 45 countries in addition to the U.S.) and lower wages, which have allowed them to be profitable on vehicles that might be a loss if assembled elsewhere. 

Finally, the U.S. auto industry remains a cyclical business. While the U.S. has experienced a historic rebound following the bottoming out during the Great Recession, the good times won’t last forever. 

PwC’s Autofacts currently forecasts sales to decline slightly to 17.1 million units in 2017, the first decline since 2009. Even with targeted moves to benefit manufacturing, the business case to spend billions on localizing assembly of vehicles in the U.S. may be challenging. 

Where does this leave the automotive businesses? The challenges that face the U.S. auto industry and U.S. manufacturing in general are complex.

The desire to return jobs to states that lost them remains a worthy task, however the return on such investments will be dependent on some combination of improved trade terms, lessened regulatory costs, and a reformed tax code.

If this combination can be achieved we can all look forward to the benefits of a continued resurgence in the U.S. auto industry.  

 

Rick Hanna is PricewaterhouseCoopers' global automotive leader.


 

The views of contributors are their own and not the views of The Hill.