Weekly News Review | 24 July 2017 | Automotive Purchasing and Supply Chain Automotive Purchasing and Supply Chain

Talking Point

NAFTA - Nada?

There have been many months of speculation over the future of the North American Free Trade Agreement (NAFTA).This piece of regulation, implemented on January 1 1994 simultaneously in Mexico, Canada and the United States eliminates most tariffs on trade between these nations. The essence of a free trade measure, NAFTA’s purpose was to encourage economic activity between the three major economic powers of North America.

Its secondary purpose was to make these countries more competitive in the global marketplace. It has been wildly successful in achieving both goals. NAFTA is now the largest free trade agreement in the world. However, two proposed policy changes by the US government — imposing a border adjustment tax and withdrawing from NAFTA altogether — would probably fail to achieve their goal of reversing the trend of offshoring manufacturing to low-cost countries and could potentially harm the US automotive industry. Car prices, vehicle sales, supply chain decisions and industry employment could all be negatively affected by the proposals.

As currently envisioned, the border adjustment tax is a byproduct of corporate tax reform. It reflects the views of US President Donald Trump, who believes that the bureaucratic state is an evil that must be defeated and, supposedly, replaced by a corporate-run state. Last Monday, in a 17-page document, the Trump administration outlined its objectives for renegotiating the agreement. Donald Trump has suggested that the US could pull out of NAFTA if the current talks do not provide greater benefits to American companies and workers, at which time higher tariffs might be implemented.

To replace NAFTA, some policymakers have called for these tariffs on vehicles and auto parts coming into the US from Canada and Mexico, ostensibly as a way to protect domestic automotive industry jobs and to encourage vehicle manufacturers to build or expand plants in the US. Ford Motor Company has rather pre-empted this by recently deciding to transfer production of its small cars from Mexico to… China.

Trump has always been implacably opposed to NAFTA. In the runup to his election, he condemned the agreement, calling it “the single worst trade deal ever approved in [the United States]”, and going on to say that if elected president, “we will either renegotiate it, or we will break it.”

It is unclear what benefits would accrue to the US if, indeed, it was to pull out of NAFTA. The effect on Mexico would, however, be dramatic and, possibly, irreversible.

Alex Kreetzer

Sam Ogle

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