As Trade Battle Looms, Mexico Has a Few Tricks up Its Sleeve

In the international poker game of NAFTA re-negotiations, U.S. President Donald Trump should not assume his Mexican opponent will be playing with a losing hand, an auto industry expert says.

“I’m going to be surprised if we see a heck of a lot changed,” said John Holmes, researcher at the Automotive Policy Research Centre at McMaster University in Hamilton, Ont. “The industry now is so highly integrated.”

Although the U.S. is a global political and economic giant, Mexico has emerged as an auto-producing power house, ranking seventh among vehicle-producing countries and is home to at least six major car makers, including the Detroit Three.

Talks among NAFTA’s three signatories — the United States, Mexico and Canada — aren’t expected to begin until sometime in June, but saber rattling between Trump and key Mexican government officials has kicked into high gear. Amid Trump’s threat to not only scrap the 23-year-old trade deal but impose a 20-per-cent import tax on Mexican-made vehicles entering the U.S., Mexico’s economy minister recently issued a threat of his own.

“The moment they say ‘We’re going to put a 20-per-cent tariff on cars,’ I get up from the table,” Ildefonso Guajardo told Bloomberg on Monday.

Mexico’s threat to scuttle talks to revamp the North American Free Trade Agreement should not be taken lightly, said Holmes. However, America’s southern trading partner holds at least one powerful bargaining chip: the integrated nature of the North American auto industry that has evolved under NAFTA.

“If the US. administration really moved to cut off imported vehicles from Mexico by significantly changing tariff structure in NAFTA or content rules of origin, at the moments it’s difficult to see how they would actually replace the loss of vehicle imports with domestic production,” he said.

“If you look at U.S. assembly plants at the moment, they’re all working at or above capacity. So there’s no spare capacity there. It usually takes at least three or four years to plan and get a new assembly plant up and running. From Mexico’s point of view, how does the U.S. actually significantly cut off the low of vehicles from Mexico? I don’t think you can do that easily in a short time period.”

Mexico’s other bargaining chip is the fact that many vehicles assembled in that country contain “a fairly significant proportion of parts made in the U.S.,” said Holmes. “There’s potentially a loss of jobs in the U.S. because of loss of parts production.”

In fact, a study by the Center for Automotive Research in Ann Arbor, Michigan noted that U.S. content in vehicles from Mexico soared from five percent before NAFTA to 40 percent today.

“U.S. suppliers have benefited from increased automotive assembly capacity throughout North america,” the CAR study said. Scrapping NAFTA and imposing tariffs on vehicle imports would cause prices to jump, sales to fall and the loss of at least 35,000 U.S. manufacturing jobs, CAR warned.

“Any move by the United States to withdraw from NAFTA or to otherwise restrict automotive vehicles parts and components trade within North America will result in higher costs to producers, lower returns for investors, fewer choices for consumers and a less competitive U.S. automotive and supplier industry,” the study said.

The U.S. push for new trade rules won’t spell the end of Mexico’s auto industry, said Holmes. “What we’re likely to see is that the current footprint for assembly gets frozen in Mexico so there isn’t a lot of new investment in the near future. But I think it will be very difficult to significantly cut back on the imported vehicles from Mexico because it’s a major source of vehicles and parts for the U.S., and that’s where the big trade deficit lies.”

Last year, the U.S. exported 157,500 vehicles to Mexico, while Mexico shipped about 2.1 million vehicles to the U.S., he said. “Clearly Trump has been fairly focused on the auto sector, but I think he’s so uneducated with regards as to how the auto sector actually works in North America,” added Holmes. “I would hope the CEOs of car companies and parts suppliers have been doing a lot of educating and lobbying within the administration in Washington to point out how highly integrated this industry is and works to make North America quite competitive in terms of producing vehicles.”

When Wilbur Ross, Trump’s newly confirmed commerce secretary, faces his Mexican counterpart at the bargaining table, it won’t be a game where winner takes all.

[Image: General Motors]