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For Global Automakers, Mexico May Be Better Than Chattanooga

(Source: forbes.com)

With the new NAFTA now official, some aspects of the auto industry may yet find Mexico as attractive to build as it ever was.

German automakers manufacturing in the U.S. met with President Trump on Tuesday. Details of the meeting were not released. It was supposedly impromptu, with facetime between Trump and senior executives from BMW, Daimler, and VW.

“Tariff Man” Trump is still threatening to slap tariffs on auto imports from Europe, citing U.S. trade deficits with those nations. Economic advisers were meeting with the threesome to discuss investment opportunities in the U.S., including in manufacturing and research and development. But new tariffs are putting all of this at risk.

Eroding trade negotiations with Europe, coupled with steel and aluminum tariffs, have increased the cost of making cars in the United States. In mid-November, BMW’s top executives in South Carolina announced that they planned to open another SUV production line in China. The company already had begun producing some X3 SUVs in China for sale in that country. SUV production was once the exclusive province of BMW’s Spartanburg, South Carolina, plant, which produces over 1,000 BMW sport utility vehicles per day.

Spartanburg is a class, small American city of under 50,000 inhabitants. It doesn’t have skyscrapers and famous universities. It has three-story buildings and downtowns run by local businesses, not multinationals. A BMW exit is bad news.

General Motors announced last week that it was closing five plants in Michigan next year. Thousands of middle-income, blue-collar jobs will be lost.

Trump lambasted the American automaker and wondered out loud if the U.S. should ask for its bailout money back, given during the Great Recession.

Trump also has an animus towards German automakers, especially if they are making them in Germany. According to Panjiva, the trade data unit of S&P Global Market Intelligence, German automotive exports to the U.S. were worth $21.7 billion in the 12 months ending September 30, or 12% of the total, after having already fallen by 5.7% on a year earlier.

All three Germany automakers are American manufacturers, too, producing cars under either their namesake marques or subsidiaries here in the U.S. The problem is that leaves them exposed to potential duties on U.S. imports of parts. For example, Daimler imports from Germany most of the parts used in its Made in the USA sport utility vehicles.

The companies have responded to the risk of tariffs, as well as underlying sales growth, by increasing their parts supplies to the U.S., something that would be music to Trump’s ears.

U.S. imports by Daimler from Germany surged 32.7% higher in the three months to October 31 on a year earlier. But Volkswagen’s imports rose a modest 5.5%.

“One alternative the three might take would be to shift production to Mexico to take advantage of lower labor costs to compensate for U.S. tariff hikes,” says Chris Rogers, director of Panjiva research. That would not be music to Trump’s ears.

The new NAFTA rules of origin requirements would be particularly easy for Volkswagen, which already produced $13.9 billion of vehicles for export, of which 48.2% went to the U.S., in the 12 months to October 31. That would allow it to reduce production at its Chattanooga, Tennessee, facilities.

“EU exporters should, in theory, be exempt from any new duties while free trade agreement negotiations are carried out between the U.S. and the EU,” Rogers says.

Trump agreed to a trade truce with China during the G20 in Buenos Aires on Saturday. So far, nothing has come up about a similar truce with Europe. Automotive exports are front and center. With GM already laying off workers in Detroit and BMW now making more SUVs in China, Trump needs to hope that the higher labor rates required in NAFTA 2.0 for Mexican auto workers do not turn autoworkers on to Mexico, and turn them off to the United States. Such a move would be the opposite of what “tariff man” Trump had hoped for in his first major trade deal revamp as President.

More Info: forbes.com

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