Although many in Canada are fearing the hit the Canadian auto industry would take if Donald Trump follows through on his promises to scuttle the North American Free Trade Agreement (NAFTA), a Michigan think-tank is predicting the hit to the US industry would be even more devastating.
Ann Arbor-based Center for Automotive Research (CAR) has released a report that predicts losses of more than 30,000 jobs, if the Trump administration follows through on plans to slap cross-border tariffs of as much as 35% on automotive products.
“Counter to the incoming Trump administration’s goal of creating manufacturing jobs, the withdrawal from NAFTA or the implementation of punitive tariffs could result in the loss of 31,000 US jobs,” said a CAR statement. “The automotive industry enjoys many alternative locations that would provide ready sourcing options outside the United States. Without NAFTA, large segments of the US automotive industry would have moved to other low-wage countries in Asia, Eastern Europe, or South America.”
That estimate comes from the belief that US car sales will shrink dramatically if automakers have to pay too much to bring their cars into the country, which would drive up price tags.
Roughly 80% of cars made in Mexico end up in the US. Most of them are low-profit-margin cars such as compacts, so manufacturers can keep production costs low (due to cheap Mexican labour) in order to sell more of them in the US. If production has to move to the US, or each car is slapped with a 35% tariff, then their prices would go up and volumes would likely go down because fewer people would be able to afford to buy them.
That would mean reduced need for the components that go into the final assembly, regardless of where vehicles are produced. Even though vehicles are made in Canada or Mexico, many of their components come from the US (estimated at 40% for vehicles made in Mexico and 25% for those made in Canada), which is why American jobs are often created even when assembly plants are added in Mexico.
CAR says data shows that boosting Mexican production by 10%, for example, boosts US employment by 1.3%, so a company with 40,000 US employees might hire on 500 more workers at its 5,000-worker operation in Mexico, but it would also likely add 520 jobs in the US.
Closing the borders would also hurt the American auto industry because Mexico and Canada are its biggest trading partners, so shipping components across borders (it is estimated that a car part crosses borders seven times before a consumer buys the car it’s installed in) would add tremendous tax costs, and further price the vehicle out of the market.
The goal of the Trump administration may be to make everything in the US, but unless counter measures are put in place (such as added incentives) selling fewer cars means reduced assembly by fewer people using fewer components also built by fewer people, and transported to assembly plants by fewer truck drivers, and that all snowballs into fewer jobs all around.