Page 167 - STRATEGY Magazine

Not since NAFTA went into effect in 1994 has the U.S.– Mexico trade relationship captured so much attention.
Now that Donald Trump sits in the Oval Office, automakers the world over are preparing for the worst—a significantly altered trade agreement among the North American countries. Although renegotiations could begin as early as mid-August 2017, Trump has not announced any specifics about plans for change.
Since major manufacturers includ- ing BMW, Mercedes, Toyota, Mazda, Hyundai, and GM have a factory (or two) in Mexico, the reintroduction of trade barriers along the border could have devastating effects. These might include—but would likely not be limit- ed to—a significant reduction in vehicle production, disrupted employment on both sides of the border, and a massive roadblock to the continued growth of the Mexican middle class.
A WORLD WITHOUT NAFTA
Ever since the American election in 2016, analysts on both sides of the border have been scrambling to predict a future without the North American Free Trade Agreement. According
to most models, that future could be bleak. Ford has already cut back its investments in Mexico—shifting the manufacture of 240,000 vehicles away from Mexico by 2020. Many fear that this is just the beginning. Since 80
percent of Mexico’s automotive exports head to its northern neighbor, a renego- tiated NAFTA could do considerable harm to a sector that represents 3.2 percent of Mexico’s GDP.
Yet no trade agreement is a one-
way street. Most experts think that if trade barriers go up, costs to American consumers would skyrocket. This fact alone may temper the protectionist tendencies of politicians in Washing- ton. If it does not, the collapse of a resurgent Mexican middle class may. Mexican citizens received nearly US$27 billion in remittances from family members working abroad in 2016,
and that number is expected to rise in coming years. Since 95 percent of that amount originates in the United States, NAFTA negotiations could destabilize large portions of the Mexican economy. Why does this matter to the average U.S. citizen? The answer is simple: a stable Mexico is less likely to become a security—or immigration—concern for its neighbors.
STRENGTH SOUTH OF THE BORDER
As Mexican officials and executives prepare for the NAFTA renegotiation, many count on the fact that Mexico is the world leader in free trade agree- ments. Deals with major economies such as Brazil and the European Union help auto companies with Mexican plants save more than US$200 million a year compared to the United States.
If significant obstacles to trade were to be implemented between Mexico and the United States, many cars would
be shipped elsewhere in an attempt to diversify the industry’s consumer base. Mexico was a huge supporter of the Trans-Pacific Partnership and is likely to join whatever agreement supersedes it among Pacific powers in order to capitalize on opportunities in Japan, China, and Australia.
Indeed, it is Mexico’s strengths—free trade, low labor costs, and steadily improving infrastructure—that make substantial changes to NAFTA unlike- ly: the benefits for American industry would be minor at best, if not nega- tive. In fact, most economists believe that if NAFTA goes, so do millions
of American jobs that depend on the complex relationships between the two countries. Automakers are counting on a retooling of the original framework, rather than a complete overhaul.
THE FUTURE OF FREE TRADE
In any case, the political turmoil in Washington has caused automakers to rethink their global strategy. The Latin American market, including domesti- cally within Mexico, is suddenly looking attractive. Since the U.S. commitment to free trade is unconvincing at this point, companies are looking to China and elsewhere as outlets for their products. Only time will tell which su- perpower sets the tone for the coming decade.
SPECIAL INSIGHT: AUTOMOTIVE
Teetering on the Border
As the United States enters NAFTA renegotiations, the Mexican auto industry holds its breath. A pivot to protectionism would spell disaster for the industry—but automakers hope that Ameri- cans remember the benefits of free trade.
According to recent analyses, five million American jobs are directly tied to NAFTA. This may be the saving grace for the Mexican auto industry—a significantly altered agreement would hurt the United States just as much as it would Mexico.
strategybg.com 165
Credit: Gualtiero Boffi/shutterstock.com