There is a shiny new car factory in Chattanooga, Tennessee. People enjoy working at this Volkswagen factory. The factory is airy, there is a lot of space inside and outside the factory for expansion. However, it will be a while until it will make more than the Passat. The people in Tennessee had hopes for Audi moving in here. Instead, Audi decided on going to Mexico. When the new Golf MkVII comes to America, it will be made in Mexico. There is no other car in sight for Chattanooga. Why is the factory, one of the best specimens in Volkswagen’s vast global collection, losing out on new jobs? The Chattanooga Times Free Press thinks it knows the reason: Lack of free trade agreements.
“A lack of free trade pacts between the United States and other nations may steer future VW production to Mexico rather than Tennessee, according to industry experts and others.”
Mexico has free trade agreements with 44 countries. The U.S. has 19. Most recent FTAs were spearheaded by Republican presidents. Under the Obama administration, only three FTAs were added, two insignificant (with Panama and Colombia). The significant agreement with Korea was signed by G.W. Bush in 2007, it was renegotiated by the Obama administration, a watered-down version was signed in 2010. At least 17 new unfinished FTAs, among those an agreement with the EU, and the Trans-Pacific Partnership (TPP), are treading water. Japan is not even included in the TPP, also because of shrill and often perplexing opposition by a Japan-bashing alliance between the UAW and the Detroit 3.
A lot is said about FTAs making imports cheaper. What is often forgotten is that FTAs make exports competitive. With the low dollar, America could be an export machine, and FTAs could be the motors. Why is this engine stalled? Cars shipped from Chattanooga to Hamburg (no FTA) cost 10 percent duty. Cars shipped from Puebla to Hamburg (FTA) cost none. No wonder the jobs go to Mexico. The wages are not the reason. Wages amount to approximately 10 percent of a car’s cost … the saved customs duty can finance the whole payroll. While Mexico turns into an export powerhouse, the unemployed north of the border pay higher prices, driven up by a trade war flamed by union interests.
And it’s not just Mexico… thanks to strong trade relations with the EU, Brazil is benefitting as well, gaining $4.4b in new VW investment.
America’s inability or unwillingness to secure more FTAs is killing America’s transplant auto industry, and preventing Obama from achieving his stated goal to grow jobs by doubling exports. This is particularly ironic considering that Obama has touted the bailout, the Korean FTA and a loan guarantee program as aimed at boosting America’s exports. FTAs boost exports. Protectionism kills jobs and causes inflation.