trump economics Trade and Trepidation in Mexico

A love-hate relationship is emerging between the auto industry and Donald Trump, whose threat to tax imports would endanger their business model building cars cheaply in Mexico, though they like his plans to loosen regulations.
Quelle: BMW
Angst in the auto industry about what Trump's trade and tax proposals mean.

International automakers are watching President-elect Donald Trump’s corporate interventionism with a mixture of hope and trepidation. They’re worried about his threat to slap import tariffs on exports from Mexico, a key manufacturing base to the U.S.

But General Motors, Ford and German manufacturers also agree with his views on currency manipulation by the Chinese and with his pledge to cut restrictions for self-driving cars and on-ease regulation in general.

Ford Chief Executive Mark Fields spoke for almost everyone in the sector when he called for a relaxation of fuel consumption rules up to 2025.

Mr. Fields is in Mr. Trump’s good books after announcing on Tuesday that Ford is scrapping a planned Mexican car factory and adding 700 jobs in Michigan.

Mr. Trump had called the project an "absolute disgrace" during the election campaign and on Tuesday set his sights on GM, threatening in a tweet to impose a “big border tax” on the company for exporting Mexican-made compact cars to the U.S.

Analysts said Ford’s announcement was a smart move because demand for compact cars is declining in any case.

The Mexican government is unsurprisingly furious. Economics Minister Ildefonso Guajardo called on Ford to repay every single peso the government had so far put into the project. Mexico’s national and regional authorities invested around $1 billion in infrastructure and subsidies to make the location in San Luis Potosí attractive to Ford. The government doesn’t understand the decision because only 7 percent of all Ford cars are assembled in Mexico. Ford has 24 plants in the U.S. employing more than 50,000 people, and just three plants in Mexico with a total of 7,000 workers.

Mexican economists now expect other automakers to follow suit. “Ford’s decision confirms the risk of a decline in foreign direct investment in Mexico starting in 2017, and made it likely that the currency will hit new lows in the short-term,” wrote Gabriela Siller of Banco BASE. She said 2017 would be a “difficult but not a disastrous year for the Mexican economy.”

It’s the proximity to the U.S., the biggest auto market in the world, and the advantages of the North American Free Trade Agreement that have attracted virtually all of the world’s top automakers to Mexico.

Other foreign automakers in Mexico are in wait-and-see mode now. They were tight-lipped about the prospect of U.S. import tariffs on cars made in Mexico.

“We’re carrying out our projects as planned,” said Thomas Karig, spokesman for Volkswagen de México. He declined to comment on the possible impact of Mr. Trump’s economic policies.

VW has been assembling cars in Mexico for half a century, investing $10 billion during that period. It runs one of its biggest plants worldwide in the city of Puebla. Five out of every 10 VW cars made in Mexico go to the U.S. The proportion is even higher for the auto sector as a whole: 77 percent of Mexican auto exports go to the U.S., according to the Mexican auto industry association AMIA.

It’s the proximity to the United States, the biggest auto market in the world, and the advantages of the North American Free Trade Agreement, which Mr. Trump has threatened to scrap, that have attracted virtually all of the world’s top automakers to Mexico.

VW’s premium cars subsidiary Audi opened its first Mexican plant in the fall of 2016 and mainly wants to export its Q5 sport utility vehicle to the U.S. from there. BMW is building a plant in San Luis Potosí and plans to start production there in 2019.

Daimler is building a plant jointly with Japan’s Nissan which is expected to open this year. The two companies are each investing $1 billion in the project.

According to Germany’s Center for Automotive Research, the world’s nine biggest automakers have invested some $24 billion in Mexico since 2010. The U.S. market is booming, with sales of more than 17 million new vehicles in 2016, of which 8 million were imported — mainly from Mexico, Canada, Japan and South Korea.

Mexico’s free trade deals with 46 countries offer manufacturers favorable terms of trade for exports to half the globe. The workforce is skilled thanks to half a century of automaking and the wages are almost absurdly low by international comparison.

According to figures from the Mexican economics ministry, a Mexican auto worker on average earns $4 an hour, compared with $11.4 in Brazil and $9 in Hungary. The average in the U.S. is $50. With 3.5 million vehicles manufactured per year, Mexico is the sixth-biggest auto producer in the world. Germany makes six million vehicles a year.

Shifting output and jobs from Mexico to the U.S., as Mr. Trump is demanding, will be a lot more difficult than it sounds. A complex division of labor has established itself between the two countries. U.S. automakers export 77 percent of their components to Mexico and Canada. Mexico wouldn’t be able to build cars without U.S. imports, and vice versa. Severing these chains of production would also be a heavy blow to the U.S. auto industry. A possible import tax of 35 percent would make vehicles “made only in USA" $3,000 more expensive per unit.

 

Mexico car producers and production

Thomas Jahn is Handelsblatt's New York bureau chief. Klaus Ehringfeld is a correspondent for Handelsblatt in Mexico, the Caribbean and Columbia. To contact the authors: jahn@handelsblatt.comehringfeld@handelsblatt.com

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