NAFTA: Free Trade, With Uneven Effects

Since the North American Free Trade Agreement was enacted in 1994, automakers and suppliers have operated tariff-free in three countries as if those countries were one, building a powerhouse manufacturing and trading bloc.

But there’s a paradox. While the industry now builds world-class vehicles in the U.S., Canada and Mexico, not all parties have benefited equally. The center of vehicle production has shifted south, from Canada and the U.S. Midwest to the U.S. Southeast and Mexico.

In the U.S., resulting blue collar outrage helped fuel the anti-trade populism of Democratic presidential candidate Bernie Sanders and Republican presidential nominee Donald Trump. And in current contract talks, Unifor, the union representing Canadian auto workers, is demanding that the Detroit 3 guarantee continued production in Canada.

“I think that Donald Trump is completely nuts, but if there’s one thing he’s right about, it’s the impact it’s had on not just Canadian workers but U.S. workers,” said Jerry Dias, president of Unifor..

Trump’s promise to renegotiate the treaty or tear it up altogether, replacing it with a 35 percent tariff on goods from Mexico, has some auto executives privately worried. As the election approaches, the question hanging over the industry is what effect altering or withdrawing from NAFTA might have. The proposed 12-nation Trans-Pacific Partnership free-trade agreement, which would supplant NAFTA, is already in trouble.

“If Trump were to come in and do what he says he’s going to do, it would destroy the industry,” says Daniel Ikenson, director of trade policy studies at the conservative Cato Institute. “Everyone expects us to lead. When the U.S. engages in this kind of nonsense, it rattles the global economic foundations. It is very dangerous rhetoric.

“If President Trump were to think he could impose a 35 percent tariff, the whole system would come crashing down.”

Flavio Volpe, president of the Automotive Parts Manufacturers’ Association of Canada, says the auto parts business operates on slim margins: “A 35 percent tariff would be a reckless instrument that would put an immediate chill on anybody’s investment in any of the three countries.”

Industry officials such as Volpe credit NAFTA with allowing North America to be competitive in an increasingly global industry.

“The rise of Mexico as a free trading zone in my opinion is one of the catalysts that allow automakers to profitably go to a global product platform,” Volpe says.

Steve Miller, CEO of International Automotive Components Group, a Tier 1 supplier based in Luxembourg with 33 plants scattered across the NAFTA region, believes NAFTA has been overwhelmingly beneficial.

“There are 50 states. What if every one of them had tariff barriers and you had to make cars in all 50 states?” Miller said in an interview. “It would be a very inefficient industry.

“The fact you can move intermediate products back and forth and do final assembly in the most efficient location is a great advantage.”

Mark Muro, senior fellow at the Brookings Institution, argues that NAFTA may well have saved the North American auto industry: “By offering a low-wage platform, the Mexican plants have increased the scale of auto production in North America, allowed further investment and I would argue allowed increased U.S. employment.”

Low-wage jobs that moved to Mexico would have been lost anyway, Muro says. But the efficiencies coming from NAFTA enabled the industry to restructure after the 2008-09 financial crisis.

He adds that NAFTA has helped promote the growth of what he calls “advanced industry” high-tech jobs in the U.S.: “The U.S. has clearly been a leader in new technology applications, the whole move into [autonomous vehicles], new lightweighting technologies, all these things that have supported a quite robust recovery from the crisis.”