A generation after the landmark trade deal, automakers aren’t even sure how they could start to unravel cross-border manufacturing of thousands of components.
The U.S. and Mexican auto sectors have become so intertwined since the inception of the North American Free Trade Agreement that the industry itself is baffled as to how it would wean itself off the brisk cross-border trade in car parts. President Donald Trump has vowed to renegotiate the 23-year-old trade pact, a move he says would shift plants — and jobs — back to the United States, but it’s not clear that even tearing up NAFTA and existing supply chains would do that.
The automotive industry is at the heart of U.S.-Mexico trade — and not just in finished vehicles. Steering wheels, dashboards, circuits, and other car parts zigzag across the borders of Canada, Mexico, and the United States many times before ending up in a vehicle in Detroit or Monterrey, Mexico. Disentangling those complex international supply chains could imperil the industry, more than a dozen industry participants and experts told Foreign Policy.
Many firms, and the auto industry itself, can’t trace the routes of the components they produce beyond their tiny slice of the supply chain. A generation after the landmark trade deal went into effect, U.S. automakers don’t know how they would turn back time.
“Manufacturing has become heavily dependent on cross-border activity, on that global supply chain,” Michael Davis, an economics expert at Southern Methodist University in Texas, said. “It’s not exactly clear how the [auto] industry would reorganize itself. Looking for new suppliers, it would be ugly.”
General Motors, Ford Motor Co., and the U.S. branch of Fiat Chrysler Automobiles — known collectively as the Big Three American automakers — did not respond to requests for comment.
By slashing or eliminating tariffs on regional goods, NAFTA transformed supply chains in a range of sectors, unleashing huge cross-border flows in component parts. By 2010, 40 percent of the goods Americans imported from their southern neighbor had started off in the United States as components and were turned into finished goods in Mexico, according to a 2010 National Bureau of Economic Research working paper. In Canada, a quarter of imports began as pieces built in America.
This cross-border activity is most extensive in the auto sector. Prior to NAFTA, American cars sold in the United States were made in places like Detroit with American-made parts, and across the region most vehicles were sold in the market where they were made.
All of that changed when NAFTA was ratified in 1994. U.S. carmakers began spreading their production throughout the trade zone, taking advantage of cheaper Mexican labor to lower production costs. Accessories for car bodies, engines, audio and video devices, seats, air bags, automatic gearboxes, and other products are now made in Mexico. Some of these larger parts are then shipped back to the United States. For instance, Chrysler’s Jeep Patriot is built in Belvidere, Illinois, but its transmission comes from Mexico. Ford’s Michigan-assembled Mustang also has a transmission made south of the border. The shift translated into cheaper car prices.
Now this cross-border trade is under threat from a protectionist president who attacked NAFTA repeatedly on the campaign trail, vowing to revamp or scrap it. Canada and Mexico have agreed to start talks on renegotiating the deal, though they haven’t been scheduled yet. Trump’s commerce secretary, Wilbur Ross, says he’d like to change rules that dictate what share of a product must be manufactured in North America in order for it to move tariff-free through the trade zone.
Right now, 62.5 percent of car parts must come from North America for the vehicle to move between Mexico, the United States, and Canada without a tariff. The remaining 37.5 percent can come from anywhere in the world, including China, Japan, Germany, and France, all of which provide car parts to American automakers. Ross says he wants to raise the share that comes from North America with an eye toward benefiting American companies.
The auto industry is scrambling to figure out exactly what impact that would have on its supply chains. But the task is easier said than done.
The average car has about 30,000 parts. Industry supply chains are now so complex that it’s almost impossible to accurately source the origin for all the components of a North American-made car, said Bernard Swiecki, a senior analyst at the Center for Automotive Research, a think tank in Ann Arbor, Michigan, that tracks the car industry. Even the big automakers likely don’t know enough about the source of their components to comply with a change in the origin rules, he suggested.
“These companies have taken a deep dive down the value chain,” Swiecki said. “They know they are complying with the current rules of origin. But if the rules change, we believe the car companies don’t have the visibility they need to rejigger their supply chains to meet new requirements.”
A top auto industry executive confirmed that assessment: The automakers don’t know where all the parts come from. They only know that the vehicles meet the current origin requirements.
“We are doing forensic work to find out how much NAFTA content we have in our vehicles,” the official said. “Once we get to 62.5 percent, it doesn’t really matter to us where the other 37.5 comes from.”
Supply chain disruptions would not only hurt large companies. Smaller firms who do business in Mexico would also have to change the way they operate, sending shocks cascading down the value chain. Ernesto Bravo, president of the West division at Tecma, a company that helps firms manufacture in Mexico, told FP that any change to origin rules would just make products more expensive and less competitive with global suppliers.
Economists suggested phasing in changes to avoid immediate chaos. “Any kind of change to this system is going to be totally disruptive and send things into disarray,” Susan Helper, a former chief economist at the U.S. Department of Commerce, said. She added that the pain could be minimized by phasing changes in over time, which would give companies lead time to adjust supply chains to meet new requirements.
An unlikelier option for the big automakers: building new plants to replace foreign suppliers that could get locked out of a redesigned NAFTA, a move that could help Trump fulfill his pledge to bring manufacturing jobs back to the United States. But the same economics that drove cross-border operations in the first place likely counsels against this.
For the big automakers, it may not be worth building a billion-dollar factory just to escape some tariffs on components, “especially with sales projections flat for the next few years,” Swiecki argued.
“A billion dollars is a lot of money to spend, even when sales are going up,” he said. “A lot of people are going to be trigger-shy.”
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