Economics,  News

How Will White House Policy on NAFTA Affect the Auto Industry?

North America Map

NAFTA (North American Free Trade Association) has been a key component of trade between Canada, Mexico, and the United States. In true Trump style, the new administration has quickly defined its official policy with respect to NAFTA and the TPP. Trump’s core voter base includes those who lost their jobs when manufacturing plants for automobile companies shut down across the rustbelt in states like Wisconsin, Illinois, Indiana, Ohio and others. Trump’s campaign rhetoric is clearly now Trump’s campaign action. He made no bones about his intention to renegotiate NAFTA as swiftly as possible, failing which the US would withdraw. In much the same fashion, Trump has withdrawn from the Trans-Pacific Partnership (TPP). Casualty #1 in this quagmire is the automobile industry. Many folks in the industry have been dragging their heels about this hotbed issue, given that Trump’s stump speeches were not official White House policy.

Now, it appears that Trump meant everything that he said and he’s wasting no time putting the wheels into motion. The new US administration is intent on renegotiating the terms and conditions of NAFTA to make them more favourable to the United States. In Trump’s own words, the negotiations would be tough and fair. The creation of more US jobs and more American enterprise are front and centre. President Donald J. Trump wants to ensure that any new trade agreements entered into by the United States will benefit US workers first, not foreign countries. Trump is pushing for a renegotiation of all current trade deals, notably NAFTA. Analysts are mixed in their opinion of the president’s policies, given that they believe that China is responsible for more theft of American enterprise, jobs and automation than Mexico or Canada.

How has NAFTA contributed to the Decay of the American Automobile Industry?

In short, NAFTA took jobs and industry from the US and exported production to Mexico. This killed off the US automobile industry. Mexico has benefited immeasurably from NAFTA, while a key component of US economic growth – automakers – has diminished year on year. It’s not only the automobile industry, but manufacturing in general which has been shipped abroad. This has also allowed for the creation of a massive supplier network overseas, when it should be growing in the United States. Most every automobile manufacturer from the US has shipped its operations to Mexico, and much the same is true of automobile manufacturers from abroad. In terms of overall annual production of vehicles, Canada is now ranked second to Mexico. The theory behind Trump’s proposed tariff is not practical. In the best-case scenario, the 35% tariff that he is proposing would likely hurt American consumers and the automobile industry over the short-term. Car sales will drop off and automobile manufacturers will report sharp losses. These sharp price rises will act as a disincentive to consumption expenditure and cause a slowdown in economic growth.

Will Higher Tariffs Make It Unfeasible for Low Income Earners to Gain Credit?

Talk of a recession has been bandied about. It remains uncertain what effect the proposed tariff would have on automobile manufacturers. According to the Center for Automotive Research, a cancellation of the North American Free Trade Agreement (NAFTA) could result in carmakers seeking alternative countries for vehicle production, rather than building new manufacturing plants in the US. This would mitigate the effects of the tariff and still allow these manufacturers to sell to the US. In such a scenario, China may benefit.

According to research, a proposed 35% tariff on light automobiles may result in a sharp decline of up to 450,000 vehicles in the US. Additionally, some 31,000 jobs may be lost in the service sector (parts, maintenance etc.). With higher prices expected for automobiles, low-income earners will likely be requesting poor credit loans. The banking sector in the US is expected to benefit from Federal Reserve Bank policy vis-à-vis interest rate hikes in 2017. Whether banks like Morgan Stanley, JP Morgan, Citigroup, Bank of America, Wells Fargo or others issue credit facilities to customers with low income is an entirely different story.

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Aaron Gormley is a valued contributor to CosmoBC's TravelBlog.

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