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Border tax, NAFTA exit will hurt US auto sector, study says

Boston Consulting Group says a 15% border tax would cost US automakers and suppliers $22 billion per year.


DETROIT — Imposing a border adjustment tax (BAT) and withdrawing from the North American Free Trade Agreement (NAFTA) would likely fail to achieve their goal of reversing the trend of offshoring manufacturing to low-cost countries and could potentially harm the US motor vehicle industry, according to a study by The Boston Consulting Group (BCG).

The study, commissioned by the Motor & Equipment Manufacturers Association (MEMA), examined the real-world implications of a border tax and changes to NAFTA on the motor vehicle sector—how they would impact new-vehicle and supplier costs, new-car features and prices, consumer purchases, jobs, and trade.

It also looked at how global macro trends in the industry are affecting the goal of encouraging reshoring and what alternative policy actions could be taken to spur growth in US automotive manufacturing. It found that car prices, vehicle sales, supply chain decisions, and industry employment could all be negatively affected by the proposals.

The border adjustment tax is a byproduct of corporate tax reform. In concert with lowering corporate tax rates to 15% to 20%, the BAT would impose at least a 15% tax on imports while exempting the value of a company’s exports from business taxes. BAT supporters in Congress hope that the added import fee will encourage manufacturing in the US, while contributing funds to help cover the overall corporate tax cut.

Analyzing the implications of a 15% BAT on the motor vehicle industry, the BCG study found that US automakers (OEMs) and suppliers would pay $34 billion in import taxes annually, while realizing only $12 billion in export benefits. This would translate into an average $1,000 increase in per-vehicle manufacturing costs at the top 12 OEMs selling cars in the US; a 20% BAT would add an average of $1,800 to per-vehicle production costs.

Why leaving NAFTA would be costly

The study found that US tariffs in the range of 20% to 35% would add $16 billion to $27 billion to automotive costs in the US market. At the top 12 passenger vehicle manufacturers in the US, a 20% tariff on Mexican imports would translate into a $650 average increase in per-vehicle production costs. The OEM that is most reliant on imports would see its per-vehicle costs rise by an average of $1,100, while the OEM least dependent on imports would face an average $100 markup per vehicle, according to BCG’s analysis. As a result, car buyers could reduce as much as 6% in supplier content—and 25,000 to 50,000 positions in US supplier factories.

An important change in NAFTA rules would weaken the ability of US motor vehicle companies to compete globally, says BCG. About half of all imported parts that US OEMs procure for vehicle production come from low-cost countries and nearly 50% of these components are from Mexico. An increase in NAFTA’s tariffs or rules of origin could drive up costs per vehicle substantially. And it would place the US motor vehicle companies at a disadvantage against, for instance, German automakers, which import about the same percentage of components from low-cost countries as their US counterparts do now.

If the support for a border tax and withdrawing from NAFTA is intended to create conditions that encourage the expansion of US automotive factories and reshoring from other countries, macro trends in the global auto industry work against that outcome.

The primary obstacle: the US market for vehicles has peaked, at least for the foreseeable future, according to BCG.

The projected seasonally adjusted US light-vehicle sales rate in 2017 is 16.5 million units, down from 17.5 million last year, and sustainable sales through 2025 are unlikely to surpass the peak of 17.5 million units. So, it wouldn’t make sense for OEMs to invest in new plants or enlarge operations in this environment. US motor vehicle suppliers face a similar capacity situation in North America.

Beyond the unfavorable market conditions for plant expansion in the US, there would be limited business rationale for reshoring Mexican production of auto parts back to the US if a border tax were imposed. Calculating production cost changes for two automobile interior components, BCG found that a part costing $15.30 per unit to assemble in Mexico would cost $2 more to make in the US, including the savings from avoiding the 15% BAT. The increase would chiefly be due to higher labor costs. Production costs for a $100 part would drop by about $11 per unit if manufacturing were shifted to the US from Mexico. But at that rate, it would take nine years to pay back a $50 million factory investment in the US, well above the three-year return on investment period that manufacturers typically aim for.

A summary of the analysis and findings can be downloaded here. A more detailed report will be published later this year.

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