Reactions of American automotive OEMs threaten US trade deficit and jobs

Reactions of American automotive OEMs threaten US trade deficit and jobs

The presidential elections in the US last year brought a lot of uncertainty for trade relations. The tensed relations with China, the US withdrawal from the Trans Pacific Partnership Agreement (TTP), the renegotiation of the North American Trade Agreement (NAFTA), and a big question mark for the Transatlantic Trade and Investment Partnership (TTIP) are making those businesses that are dependent on import – export, especially the automotive ones, fidgety.

The hottest of issues on the (negotiation) table when it comes to NAFTA is automotive, the largest source of trade deficit for the US. Canada is the main beneficiary of NAFTA auto trade. Looking at the below graph provided by Panjiva (a global trade database with import and export details on commercial shipments worldwide), US sold autos and Mexico-made automotive parts carry the auto trade deficit within NAFTA.

Winners and losers of NAFTA auto trade in 2016

Source: Panjiva

Both Canada and Mexico have welcomed the possibility to renegotiate NAFTA and potentially add stipulations about goods and services, which at the time of its signing were not considered. As the US Senate has just approved the appointment of Robert Lighthizer as the US Trade Representative, the process of negotiating NAFTA can start. The process is slowed down by the various studies order by President Trump: the “section 232” reviews of steel and aluminum; the Omnibus report on the trade deficit; the impact of trade deals on “Buy American” policies; and the “performance review” of trade deals. The final findings are not expected until 2018. Panjiva Data shows that this delay does not work in favor of Mexico since historically, the trade deficit tends to grow towards the end of the year.

There are two related threats associated with the reaction of the automotive industry to the Presidential reforms in trade:

The first one is that US manufacturers may choose to move their entire value chains in Mexico or Canada or both and import vehicles with a tariff applied, basically jumping across the red line (above). This will both deepen the trade deficit and lead to a further loss of jobs. According to the Alliance of Automotive Manufacturers, there were 7.25M jobs in the auto industry in 2016, which means 1 in 25 Americans are dependent on the automotive industry along its value chain: 2.44M are directly dependent on automakers, while 3.16M are dependent on the suppliers and their jobs are at risk in this scenario. They will add to the already 2 million jobs lost between 1999 and 2011 due to importing goods from China or factory relocation, and another 1 million jobs lost since the implementation of NAFTA. Michigan, Ohio and Indiana, the largest employers in the industry, are at particular risk.

The Automotive industry impact on the jobs in the US

Source: Alliance of Automotive Manufacturers

The second one is a preemptive acceleration of imports from Mexico and Canada before the tariffs are instated. According to The Mexican Association for the Automotive Industry (AMIA), vehicle exports from Mexico increased by 16.1% in April this year compared to the previous year. While this represented a slowdown compared to the previous month (Panjiva), shipments reached their highest on record at an average 256,800 units. The growth was led by (finished) autos, which jumped 25.9%. The acceleration in exports for FCA, Ford and Volkswagen speaks volumes about the concerns about a renegotiation of NAFTA as well as to a desire to beat soon-to-be-instated tariff changes. The data from the US Department of Commerce confirms that overall, the trade deficit in vehicles in the first quarter of 2017 has exceeded the one in 2016 by $1 billion.

We live in exciting times for (free) trade. The US Presidential administration has been and will be pushing initiatives to improve the position of the US in trade agreements. But it is very possible that the automotive industry will react in a manner that will backfire for the American Presidential Administration. If the automotive OEMs will move their entire value chains out of the U.S. and choose to import vehicles with a tariff applied, not only will the trade deficit deepen significantly, but it will lead to a heavy loss of jobs. The level of uncertainty surrounding NAFTA will continue through the rest of the year. Due to the lengthy consultation process, we will not see anything definitive before 2018.

Categories: North America

About Author

Alina Harastasanu

Alina Harastasanu works as a business analyst and has over 7 years experience in consulting and international business. She holds a B.A. in Political Sciences from the University of Bucharest, a M.A. in Geopolitics and Global Security from University of Rome “La Sapienza” and an MBA degree focused on International Business and Strategy from The Ohio State University.