Business Ethos Blog

North American Free Trade Agreement: Exit or Update?

Dr. David Mielke, Retired Dean of the College of Buskiness at Eastern Michigan University

Dr. David MielkePresident-elect Trump made several campaign statements about tearing up trade agreements and slapping on tariffs to bring manufacturing back to the US.  One of these agreements was the North American Free Trade Agreement or NAFTA.  One target was the auto companies and their moves to Mexico to produce cars.  What would be the impact on the US auto industry if the US pulled out of NAFTA?  The impact on Michigan?  Would there be a significant increase in US auto jobs?  Does it make sense to tear up the trade agreement?  Or is it time to update the agreement as suggested by the President of Mexico?  Did President-elect Trump over promise and will he under deliver?  What is the “Right Thing to do?” Let’s look at some issues:

  1. Since the beginning of 2010, automakers, including BMW, Fiat Chrysler, Ford, General Motors, Honda, Hyundai, Mazda, Nissan and Volkswagen have announced more than $24 billion in investments in Mexico.
  2. The US can unilaterally pull out of NAFTA with 6 months’ notice to its other members, Mexico and Canada.  It’s not unprecedented to leave an international agreement without congressional approval.  In 2002, President Bush pulled out of the 1972 Anti-Ballistic Missile Treaty without it.
  3. According to the Center for Automotive Research in Ann Arbor, automakers employed 47,556 assembly workers in Mexico in 2014, compared with 171,982 in the US.
  4. Given that the US economy added about 161,000 jobs in October, close to the monthly average for 2016, adding another 47,556 would not have a big impact.
  5. Of the 43 major automaker assembly plants in the US, there are 12 in Michigan.  Assuming that those 12 plants would get a proportional share of the jobs in Mexico, it would add 13,271 new workers in Michigan.
  6. Many of the 47,556 assembly jobs are in plants operated by foreign automakers such as Volkswagen and Nissan. They ship many of those vehicles to Europe.  For example, Toyota ships about 75% of the cars they produce in Mexico to non-NAFTA countries.  About 18% of all vehicles produced in Mexico are exported to non-NAFTA countries.
  7. Many of the autos produced in Mexico by US manufacturers, especially the small cars, the bulk of US cars produced there, are sold in the Mexican market.
  8. US automakers made about 16.1 cars per worker in 2014 and workers in Mexico made 5.1.  If the US automaker plants were shut down in Mexico and production brought back to the US, 47,556 jobs would not be created, far less, because of the productivity difference.
  9. UAW assembly workers in the US have an entry level pay of $17 per hour.  The same workers in Mexico earn $5 an hour.  It is estimated, by Crain’s, that the labor costs for the new Michigan workers alone would cost $347 million more, cutting automaker profits.

President-elect Trump can unilaterally exit NAFTA.  But would that result in a significant increase in automaker jobs here in the US and in Michigan?  How many more cars would be produced here for the US market?  Would foreign manufacturers shift production from Mexico to the US or to other low cost countries?  Bill Ford did announce after the election, that Ford would not shift production of the Lincoln from the US to Mexico.  Given the impact on trade with Mexico and Canada on so many industries besides automakers, does it make sense to withdraw from the agreement, or rather update and renegotiate segments that are now outdated?  What is the “Right Thing to do?”  President-elect Trump may have over promised and will under deliver.  Even if all the automaker jobs would return to the US with an exit from NAFTA the impact would not be significant, even in Michigan.  Renegotiating and updating NAFTA would make sense.  We could say that his statements about bringing jobs back to the US have had an effect, Ford will not move the Lincoln jobs to Mexico.  That should continue to be his emphasis, keeping US jobs from leaving.  He can do this by cutting corporate taxes and reforming the tax code and removing the regulations that have hurt US corporations as well as focusing his bully pulpit on companies planning to leave.  He may have over promised, but he can deliver by improving the overall US business environment and saving existing jobs in the US.  Exit or Update?  Focus on updating.