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If NAFTA Ends, Ford's Move to China Will Be Just the Start

The auto industry is changing in ways that favor the U.S. – as long as Mexico and Canada are part of its supply chain.
FOrd
Bloomberg / Contributor

Ford announced this week that instead of building its new Focus – the best-selling car in the world – in a new $1.6 billion dollar Mexico-based plant, it will ship cars for North American customers from China.

Ford has promised that its decision won’t reduce its workforce. Yet even if that is true, American workers will lose. Today the compact Focus uses steel from Wisconsin, axles from Oregon, seatbelts from Indiana, grills from Michigan, tire pressure sensors from Tennessee, front-side shafts from North Carolina and Ohio, and the list goes on. With the shift, these raw materials, parts and components will be sourced and put together in Asia, eliminating dozens of U.S. based suppliers, and likely costing many of their employees their jobs. While assembly was scheduled to move from Michigan to Mexico, that would have ensured ongoing American employment – as over 40 percent of the value of vehicles “made in Mexico” comes from U.S. factory floors and U.S. offices. For products imported from China – as the new Ford Focus will be starting in 2019 – this number is a negligible 4 percent.

Ford made the decision first and foremost for market reasons. China’s 28 million vehicle market is the largest in the world. And while U.S. demand for smaller cars has faltered, in China it is growing at a robust 4 percent annually. Already nearly half of the million Ford Focus models sold each year go to Chinese buyers. Importing vehicles isn’t an option as the United States doesn’t have a free trade agreement with China, so cars coming from abroad face a stifling 25 percent tariff.

Transferring production east will also save Ford significant upfront costs. Rather than sinking more than a billion dollars into a green field operation, it can adjust and expand two existing Chinese plants, making output more nimble in the face of potentially fickle consumer demand.

Further, small cars have always been a challenge for Detroit. With the lower prices come the slimmest of profit margins. General Motors (GM) recently left Europe entirely, selling its operations to PSA Peugeot Citroën, as it couldn't make a go of it in a place not partial to larger pickups and SUVs.

Yet despite these business calculations, until now small cars destined for the North American market were mostly made in North America. One of the reasons has been NAFTA. During the 23-year tenure of the free trade agreement, autos have become one of the region’s most integrated sectors, weaving together companies spanning United States, Mexico and Canada into a North America-wide assembly line. A telling statistic: Before NAFTA, U.S. content in Mexican-made cars was roughly 5 percent; today it is over 40 percent.  NAFTA gave car companies and their long chain of suppliers the aggregated benefit of access to talented engineers and scientists, differential labor costs for the high- and low-skill parts of production, a stable legal environment, and zero tariffs.

The ability to leverage the distinct advantages of each country in research and development, production, marketing, and sales helped make North America the dominant continental and global auto player, producing 18 million vehicles a year. This landscape has benefited not just Detroit’s Big Three – Ford, GM, and Chrysler – but also attracted investment from BMW, Audi, Nissan, Toyota, Honda, and other international brands, which encouraged hundreds of their preferred suppliers to set up shops and factories across North America’s heartlands. As a result, more BMWs are made in Spartanburg, South Carolina than in Munich, Germany, the headquarters for the 60 billion dollar company.

Ford’s recent decision reflects the current challenges to this dominance. The economics are shifting, as emerging economies offer both workers and consumers to car companies. So too are the politics: If the tariff free and cross-country production benefits of a combined North America end, then making cars in China or elsewhere makes even more sense.

The questioning of NAFTA comes just as China aspires to build its own global auto footprint. To date, Chinese producers have left the iconic American industry alone, instead working out quality kinks at home and trying to keep up with voracious domestic demand. But over the last five years its local champions have begun aggressively exporting, starting with developing countries including India, Iran, Indonesia and Malaysia. Chinese makers are also investing abroad – in May JAC Motors announced plans to partner with Mexican telecommunications tycoon Carlos Slim on a Hidalgo plant to build vehicles for Mexico and the rest of Latin America.

The auto industry is transforming in ways that potentially play to America’s strengths. It is rapidly automating – already using nearly four out of every ten deployed robots in the United States. It is also advancing technologically, developing new lighter materials, electric powered vehicles, and driverless options. But U.S. commercial vehicle dominance depends on regional production, and the benefits of Canadian and Mexican suppliers and assembly. To ensure that future cars and trucks are made here, NAFTA, and the deep production ties linking the three neighbors, needs to stay.

ABOUT THE AUTHOR
Shannon O'Neil is the senior fellow for Latin American Studies at the Council on Foreign Relations and a member of AQ's editorial board.
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Any opinions expressed in this piece do not necessarily reflect those of Americas Quarterly or its publishers.


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