How NAFTA Keeps Your Car Cheap

How NAFTA Keeps Your Car Cheap

The North American Free Trade Agreement, or NAFTA, is an agreement designed to reduce trade restrictions between the USA, Mexico, and Canada. The Automotive Industry is one of the largest industries to take advantage of NAFTA. Many manufacturers conduct most of their production for the American market in Mexico. Many European and Asian automotive manufacturers also take advantage of NAFTA.  reduce trade restrictions such as tariffs on completed cars being imported into the US, Mexico also has cheaper labor in in comparison to the US and Canada.

Our current president has made it clear that he is not a fan of NAFTA and hopes to make changes to the trade deal that will end up in the US getting a better deal out of it. However, for the automotive industry, if NAFTA were to be completely removed and trade restrictions replaced could lead to a spike in the prices of new cars. Around 40% of the cars sold in the US market are produced in Mexico and then shipped over to the US for final sale. If tariffs were to be placed on all of these cars it could spell large increases in prices of new cars and thus a big decrease in new car sales. And it won’t just be American manufacturers facing this problem but many manufacturers from Europe and Asia also.

Yet worry over the future of If fear that NAFTA will be revoked could also lead to some good things for our economy. It is likely that cars produced in Mexico with an import tariff would be more expensive than if the car was just made in the US. If that were to be true then we would see American and foreign manufacturers invest more in American factories and production lines. This would create more jobs for Americans and boost our economy, as long as manufacturers opt for American production instead of simply reinvesting in another country with cheaper labor.

One thing that keeps manufacturers from easily engaging in the U.S. market is the large number of safety and emissions restrictions that are different between the countries, which prevents manufacturers from producing the same car model throughout the world. Restrictions come in all different forms, from airbag requirements to the size of the surface area of the rearview mirror. These small changes make the companies repeatedly redesign their cars, preventing companies from achieving full economies of scale. There are many movements and organizations that are trying to standardize manufacturing requirements across the board, but such groups have made very little progress in achieving their goals. The restrictions last for 25 years, but after that point, importing cars into the US becomes legal. This has become a large industry for older car enthusiasts.

Standardization of production requirements would allow for many new models of cars to reach the US. Regulations make some models unsuitable for the U.S. market, but relaxing restrictions could lead to more vehicles able to meet consumer needs. The biggest market that would be affected by an influx of new vehicles is the small truck market. American manufacturers essentially have a monopoly on the American truck market, because of a series of protectionist trade restrictions. There are a few outliers such as the Toyota Tacoma and Nissan Frontier, etc., but many trucks that fall under a foreign brand are still built, designed, and manufactured by the American division of those companies. This is because Americans are unique in the way we consume trucks. We want bigger and disposable, a style of truck that would not sell well almost anywhere else in the world.

The American truck manufacturers don’t want competition from Europe or Asia. The lack of competition in the US has let the industry remain stagnant in development. There are trucks available in Europe that are more fuel efficient and can beat out many American trucks. The Volkswagen Amarok is a great example of this: it is a truck similar in size to the new Colorado and remains competitive to the Colorado but the Amarok can get 34 miles per gallon…in a truck! But unfortunately, these trucks are not allowed to be sold in the US due to different emissions, safety, and controlling of the market. All of these factors have deterred Volkswagen from attempting to sell the Amarok in the US.

In reality, it is very unlikely that there will become a standardization of parts, safety rules, emissions rules, and import laws between North America, Europe, and Asia allowing for free trade and sale of all cars between them. For that to happen, a massive agreement between manufacturers, governments and consumers would have to be forged. The pure scale of such an agreement amounts to a monumental task that just doesn’t seem likely in the near future. Looks like car enthusiasts will be stuck waiting twenty-five years for that cool foreign car.

 

Sources:

Mayeda, Andrew. “Trump’s Nafta Victory Rides on Big Changes to How Cars Are Built.” Bloomberg.com, Bloomberg, 27 June 2017, www.bloomberg.com/news/articles/2017-06-27/trump-s-nafta-victory-rides-on-big-changes-to-how-cars-are-built.

Campoy, Ana, and Youyou Zhou. “Here’s a Way the US Could Get a Better Deal out of Nafta without Changing It.” Quartz, Quartz, 17 Aug. 2017, qz.com/1045496/nafta-renegotiation-how-the-us-could-get-a-better-deal-without-changing-nafta/.

“Is the Volkswagen Amarok Truck Ever Coming to the U.S.?” York Volkswagen Blog, 3 May 2016, www.yorkvw.com/blog/is-the-volkswagen-amarok-truck-ever-coming-to-the-us/.

Colias, Mike, and Chester Dawson. “More U.S. Cars Are Being Made in Mexico.” Fox Business, Fox Business, 25 July 2017, www.foxbusiness.com/markets/2017/07/25/more-u-s-cars-are-being-made-in-mexico.html.