Friday, January 13, 2017

Trump plans steep tariff on Mexican car production

Trump has targeted Japanese car production in Mexico as well as that of U.S. auto makers in an attempt to bring production back to the United States.

Japanese automakers already produce far more vehicles in the U.S. than in Mexico. Mexico produces about 1.4 million vehicles annually compared to the US where the top three Japanese automakers already produced around four million vehicles in 2015. The large automakers Toyota and Honda produce less than ten percent of their output in Mexico while Nissan is most at risk as it produces a quarter of its vehicles in Mexico.
Trump has claimed that as well as renegotiating the North American Free Trade Agreement (NAFTA) between Mexico, the U.S., and Canada he would initiate a 35 percent tariff on cars exported from Mexico to the US. Even a 10 percent tariff would hit Nissan the worst with a 10.3 percent reduction in earnings. Mazda would lose 5.5 percent. Honda 2.2 percent and Toyota a mere 0.7 percent. None of the four companies have any immediate plans to change the location of their production.
However, analyst Chris Richter said: "As long as this administration is in place I suspect (Nissan is) not going consider any additional capacity there." Honda has already announced it will expand U.S. production of popular CR-V-SUV for the U.S. market. Toyota on the other hand is building a new plant in Mexico to produce the entry level Corollas sedan which is currently being produced at plants in Mississippi and Ontario. Demand for the vehicles has slumped as gasoline prices have dropped. However, Toyota president Akio Toyoda claimed: "We're always considering ways to increase production in the United States, regardless of the political situation."
Trump has also criticized U.S. companies such as GM and Ford Motor company for manufacturing outside the U.S. including Mexico but Nissan remains the company most at risk from Trump's policy. Nissan built its first Mexican plant fifty years ago and is now producing 800,000 cars there annually mostly the Versa and Sentra sedans. It exports roughly half of its production to the U.S.
Mexico is often thought of as attractive to auto-makers because of its low wages but there are other quite important factors. Mexico has agreements with 44 countries giving it access to fully half the global market tariff free. In contrast, the U.S. has similar deals with only 20 countries that only make up nine percent of global sales. Trump has complained about GM's Chevy Cruze hatchbacks produced in Mexico but most of the production goes overseas not to the U.S. They are more popular with buyers in South America and Europe than with Americans. The U.S. might gain more jobs simply by negotiating agreements with other countries such as Mexico has.
Kristen Dziczek, an analyst, says: "It’s pretty ironic that what makes Mexico successful is free trade. 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." While auto makers do save hundreds of dollars on labor costs part of this saving is eaten up by other costs such as shipping so that as a result the saving per car is actually a small percentage of total cost. Hence, automakers often increase production in Mexico for reasons other than a lower labor cost. The companies save because of Mexican trade deals with Europe: ".. 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 Ford Motor Company announced that it will not build a projected plant in Mexico. Trump tweeted: “Thank you to Ford for scrapping a new plant in Mexico and creating 700 new jobs in the U.S. This is just the beginning - much more to follow." Ford announce that it was canceling the $1.6 billion Mexican factory and instead investing $700 million in a Michigan plant.

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