The U.S., Mexico and Canada are preparing to begin renegotiating the North American Free Trade Agreement—a move likely to create odd alliances as governments, manufacturers, farmers and labor vie for new benefits.
The focus, of course, will be between Mexico and the U.S. because of President Donald Trump's ultimate aim to increase U.S. manufacturing and build a wall between the two nations. The details will be scrutinized and the outcomes uncertain, but a difficult balance must be struck to keep the whole agreement from falling apart.
At the center of the risks and opportunities is Southeast Michigan's automotive industry.
Some potential changes could benefit Southeast Michigan companies or workers, but what might be good for, say, a manufacturer might be bad for organized labor.
Where you from?
The Trump administration is likely to focus on the country-of-origin rule in NAFTA—which states a new vehicle must have 62.5 percent content made in the NAFTA region to cross borders tariff-free. Given the White House's push to increase domestic manufacturing, it's probable it will push for a U.S.-specific content requirement on cars imported to the U.S., which would lead to higher car prices for consumers, but support more U.S. jobs.
In theory, a high U.S. content requirement could force manufacturers to produce more domestically. However, country of origin is difficult to assess.
The American Automotive Labeling Act was enacted alongside NAFTA in 1994 and requires auto makers to provide information on the label detailing the amount of U.S. and Canadian parts content, the country of assembly and the engine and transmission's country of origin. Yet, even those figures are not clear. U.S. and Canadian content are combined into one number, and auto makers are allowed to round up totals on parts that are more than 70 percent made in U.S. and Canada to 100 percent made in those countries.
Ford Motor Co. confirmed it does not currently track the percentage of U.S. content on its vehicles, only adhering to the AALA guidelines of the combined U.S.-Canadian content.
General Motors Co. did not respond to requests on whether it tracks all U.S. content. FCA US L.L.C. declined to provide detail.
If production of certain parts does shift across the border, small increases in employment could result in a win for Southeast Michigan's workforce.
Used car conundrum
For Southeast Michigan auto makers and suppliers, used cars could spark a battle between the U.S. and Mexico as a provision looms to open the floodgates on used cars from the U.S.
Mexico banned used car imports from the U.S. for decades, which constrained the used car market from imports and pushed new car sales. From 1996 to 2007, new car sales in Mexico spiked from 331,614 units to 1.1 million units, according to research from Ann Arbor-based Center for Automotive Research.
But the country was required, per NAFTA, to begin easing restrictions in 2009. New car sales plummeted, partially due to the Great Recession that bled across the border, from 1.04 million units in 2008 to 756,555 in 2009. That figure has recovered and new car sales in 2016 nearly reached 1.6 million in Mexico last year, but by 2019 Mexico must eliminate tariffs on used vehicle imports from the U.S. and Canada, per NAFTA.
This could suppress new car sales, and Mexico could push to extend the used car restrictions in renegotiation.
U.S. auto makers on the other hand, would love to see used cars migrate across the border to constrain the U.S. used car market. The average age of used cars on U.S. roadways hit a record in 2016 at 11.6 years old, driven by the manufacturing of higher-quality vehicles, according to Southfield-based IHS Markit.
A reduction in the supply of used cars would raise prices and turn more buyers toward new vehicles — which are projected to begin slipping from last year's record high of 17.6 million units.
This would be a big win for Southeast Michigan's auto industry and could result in sustaining or creating new jobs in the region as well as boosting revenue.
The question of wages
The Mexican government may cede one or both of those U.S. asks, but it will want something in return. While NAFTA boosted exports to the U.S.—exports to the U.S. grew from $39.9 billion in 1993 to $294 billion in 2016—it failed the people of Mexico.
The average annual wages in Mexico dropped nearly 12 percent between NAFTA's enactment in 1994 and 2015, according to data from the Organization for Economic Cooperation and Development, using 2015 exchange rates. Comparatively, average annual wages in the U.S. increased 32 percent in the U.S. and 38 percent in Canada during the same period.
Corn is to blame… sort of. While NAFTA removed agriculture tariffs, it did not restrict U.S. subsidies—the government heavily subsidizes the farming of corn and other crops. Subsidized, cheaper U.S. corn flooded into Mexico and routed Mexican farmers, ultimately claiming roughly 2 million agriculture jobs, according to a 2014 report from the Center for Economic and Policy Research.
Unsurprisingly, Mexicans poured over the Rio Grande into the U.S.—rising by 79 percent between 1994 and 2000. Immigration has since dropped off from its peak in 2000 of more than 770,000 Mexican immigrants crossing the border to a low of 140,000 in 2010, thanks to stricter immigration policy and the effects of the Great Recession.
Mexico will look for ways to further boost its middle class without drowning out foreign investment from auto makers. One way to accomplish this is to establish higher minimum wages at auto plants in the country—a move that may garner support from unlikely partners: the UAW and President Trump.
The UAW has blamed NAFTA for many of its woes, including its diminishing ranks across the country. UAW President Dennis Williams plans to host a roundtable for media in the coming weeks to discuss its position on the renegotiation, but wouldn't comment for this analysis. The Trump administration could push for this as well, as it could create a more compelling reason for manufacturers to produce in the U.S.
Think about that. A Republican president, labor unions and the Mexican government joining sides against the U.S. auto industry.
Let's not forget the 800-pound maple leaf in the room. Canada is expected to push for its own set of new provisions, including a more open government procurement system for companies to compete on infrastructure projects and expansion of temporary work visas, CBC News reported.
The mobility of Canada's labor force, particularly those looking to travel from Windsor to metro Detroit, is now constrained by NAFTA provisions as industry has become more technical.
When the agreement was drafted, a list of job categories was drafted to allow temporary work visas for certain industries, including automotive. However, rapid technology advancements have changed the labor needs of the industry, and NAFTA has not adjusted.
Canada's desire to expand that list could lead to new temporary workers crossing the border into Southeast Michigan, which could expand the talent pool.
It's unknown whether the Trump administration, which has sought to restrict temporary visas, will be receptive to Canada's wish list.