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Why Trump Taris on Mexican Cars

Probably Wont Stop Job Flight
By David Welch and Dave Merrill
January 4, 2017

President-elect Donald Trump says he wants automakers to build cars they sell in the U.S at
home or pay a hefty tax. On Tuesday he criticized General Motors for building the Chevrolet
Cruze hatchback in Mexico. And during the campaign, he called for a 35 percent tari on autos
produced south of the Rio Grande. But it may be more free trade, not taris, that would help
the U.S. keep some factory jobs from moving south.
After Trump criticized GM, Ford said it would scrap plans to build a $1.6 billion plant in Mexico
and build its Focus compact car at an existing facility there. Despite that, U.S. automakers
Ford, GM and Fiat Chrysler are planning to manufacture almost 1 million more cars in Mexico
by 2022, according to LMC Automotive, while building half a million fewer cars in the U.S.
They're not alone. Over the past five years, automakers have rushed to build factories in
Mexico. The largest car companies have announced at least $22 billion in investments and
about 25,000 jobs at new or expanded plants in Mexico by 2019. And thats just the jobs that
have been made public.

Cheaper labor is only one reason Mexico has seen a surge in new-car production. While the
countrys low wages have been the big attraction, one of its key advantages is that it has trade
agreements with 44 countries, giving automakers access to half the global car market tarifree. The U.S. has similar trade deals with just 20 countries, which make up 9 percent of global
car sales, according to the Center for Automotive Research in Ann Arbor, Michigan.
A GM spokesman said most of the Mexican-built Chevy Cruze hatchbacks Trump targeted on
Tuesday are exported overseas. Many of the new plants opening in Mexico are producing small
SUVs and compact cars such as the Cruze that are more popular with buyers in South America
and Europe. That means, that for Trump to get jobs flowing back into the U.S., he might be
better served seeking the kind of open market that Mexico has created.
"Its pretty ironic that what makes Mexico successful is free trade," said Kristen Dziczek, an
analyst at CAR. "You can look at the new investment that has gone into Mexico and while a
huge portion is for the U.S., they are selling a lot elsewhere, too."

Ford spokesman Karl Henkel said that Ford's decision to build its Focus compact and Fusion
sedan in Mexico "is not solely tied to whichever agreement has the lowest taris." He did say
that low cost is important, especially in Mexico, but location of the plants relies on multiple
To get a better sense of Mexicos advantage, consider a $25,000 midsize sedan built and
shipped in Mexico with one in the U.S.
Automakers can pay Mexican workers a lot less. Total hourly compensation in the motor
vehicle manufacturing sector is about 80 percent less for Mexican workers compared with that
for U.S. workers. Considering assembly time for a typical midsize car, an automaker can save
$600 per vehicle on labor costs.

Infrastructure in Mexico lags behind the highway and rail network in the U.S., so it actually
costs automakers $300 more per car in additional shipping expenses to produce the vehicle in
Mexico and ship it to Europe, and an extra $900 to ship it to the U.S.
That means, even after paying significantly less on labor, a car company is walking away with
wage savings of only $300 per cara fraction of what it costs to build and ship in the U.S. The
bulk of the savings are tied to Mexicos trade agreements and cheaper parts.
Automakers can save $1,500 per car on cheaper Mexican auto parts. Certainly, a lot of those
savings are tied to the lower wages workers in Mexico are paid. But some of these parts are
imported to Mexico tari-free from countries in Europe and Asia, particularly for the foreign
automakers who are increasingly investing in Mexico instead of the U.S. Since the U.S. doesnt
have as many free trade agreements, some of the automakers would pay extra for some of those
parts if they made those models in the U.S., said Bernard Swiecki, senior analyst at CAR.
The same company selling that mid-sized car saves $2,500 per vehicle that it builds in Mexico
and ships to Europe because the U.S. doesn't have a trade agreement with the EU. That's more
than it saves in parts and wages once shipping costs are figured in.
So, in total, an automaker saves more than $4,000 by building and shipping a car from Mexico
to Europe instead of from the U.S. If Trump could match those trade deals, he would erase an

average $2,500-per-vehicle cost advantage over American-made midsize cars.

The cost advantages from Mexicos trade agreements are adding up. Automakers avoided about
$770 million in taris in 2014, the most recent year for which data are available, that they
would have paid had their exports come from the U.S. rather than Mexico.

Make no mistake, the majority of Mexicos auto exports are still sent tari-free to the U.S. and
Canada under Nafta. Mexico sends 2 million cars a year to the U.S., more than half its total
production. But those shipments are making up less of Mexicos total exports. By 2018, 28

percent of Mexicos production will be exported to countries besides the U.S. and Canada, up
from about 18 percent in 2015.
Less than 10 percent of U.S. production is sent oshore because American plants tend to make
more expensive vehicles that car buyers in emerging markets cant aord, and because
Mexicos trade deals have increasingly made the country a center for export.
GM will send more than half of the new Chevrolet Equinox SUVs built at a plant in Ramos
Arizpe, Mexico to markets in South America, the Middle East and Asia, according to a person
familiar with the matter. Similarly, Audi opened a brand new plant in Mexico to build its Q5
luxury SUV in September, with executives talking up the countrys free trade deals when it
announced the start of production.
In some ways it makes no sense to bash Nafta, said Swiecki. You could abolish the
agreement but that wont abolish the other agreements that Mexico has with other countries.
Source: Center for Automotive Research, Bloomberg research

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