Living in interesting times

Now that Donald Trump is officially ensconced in the Oval Office, we can turn our attention to how he intends to disrupt North American trade, and the ramifications for Canadian manufacturers in the automotive sector.

Although Canada’s position in global automotive production has slipped over the past decade, mostly in Mexico’s favour, it continues to be an important economic driver. Vehicles and parts account for more than 10% of manufacturing GDP and $85 billion in shipments, mostly to the US. More than 120,000 people are directly employed in the sector and there is an additional 400,000 spin-off jobs.

During the US presidential election Trump derided the North American Free Trade Agreement (NAFTA) as the worst deal ever and promised to renegotiate its terms more in America’s favour, or rip it up.

Much of his disgruntlement over lost US manufacturing jobs is aimed at Mexico. We have seen how his late-night tweeting over planned investments there has rattled automakers. He threatened them with import tariffs of 35% on Mexican-made vehicles as an inducement to maintain or add new manufacturing jobs in the US.

This focus on NAFTA and investment in the US raises troubling possibilities for Canadian auto parts makers and assemblers. Investment in the Canadian industry has been stagnant. Although Unifor managed to secure labour agreements worth $1.6 billion from the Detroit 3, what happens four years from now when the contracts expire is anyone’s guess, especially with NAFTA at risk.

But Republican lawmakers are keen on a border adjustment tax as a part of their corporate tax cut (from 35% to 20%), which could be imposed on exports from all countries, and would include vehicles moving from Canada to the US.

An analyst from the Center for Automotive Research (CAR), an automotive research firm in Ann Arbor, Mich., told the Windsor Star such a tax could add 20% to the price of vehicles destined for the US market from Canada.

CAR has also tallied the cost of tearing up NAFTA in a recent study, warning it would disrupt the automotive industry’s intricate supply chain and end up costing US jobs.

NAFTA allows automakers to take advantage of best-cost production and lower supply chain risk, thus ensuring automotive production remains in North America. Without it, big segments of the industry would have moved to low-wage countries in Asia, Eastern Europe and South America. These options are still available.

On the parts side, China, South Korea and Japan could end up displacing Canada and Mexico. Picking on Mexico jeopardizes the 40.3% of US content in Mexican-built vehicles. The CAR study estimates 20,000 US parts jobs and 11,000 assembly jobs would be lost.

Michigan would be hit especially hard by a withdrawal from NAFTA. Indeed, Trump would be sticking it to the people he promised to protect.

Mexico and Canada are top foreign markets for Detroit. Mexico accounts for 39% of goods exports ($17.3 billion) and Canada 34% ($15.1 billion). CAR also predicts the state’s high concentration of engineering and automotive-related employment would be at risk to other countries if production shifts outside the NAFTA region.

The CAR study concludes any move by the US to withdraw from NAFTA or to otherwise restrict automotive vehicle, parts and components trade within the region, will result in higher production costs, lower returns for investors, fewer choices for consumers and a less competitive US automotive and supplier industry.

To paraphrase the English expression (myth buster: it’s not a Chinese curse), we live in interesting times. For now, as the meter runs out on NAFTA, the only thing we can count on for certain from the Trump administration is uncertainty.