Rougher Ride After NAFTA?

For the North American auto industry, said to be NAFTA's big manufacturing winner, the journey through the rest of the Americas could be a bumpier ride.

By one estimate, a Free Trade Area of the Americas (FTAA), extending from the Arctic to the southern tip of Argentina, excepting Cuba, could add as many as 2.5 million units to annual sales of new cars and light trucks in the Western Hemisphere. However, that prospect is in doubt less than a year before the Jan. 1, 2005, target date for the United States and 33 other nations to complete FTAA negotiations. The reason: There are some significant doubts about the FTAA itself. For example, in the wake of a fractious meeting among the hemisphere's trade ministers last November in Miami, it appears an FTAA may not be completed before 2006. What's more, if nations are allowed to opt-out of its major provisions, the FTAA could be much less of a free market for consumer goods, industrial goods, agriculture, services and investment than envisioned by either the current Bush administration or the Clinton administration, which first proposed the pact in 1994. "What we have is a more complicated process -- something like developing a TV cable system that has a basic service and premium channels," analogized Frank Vargo, vice president for international economic affairs at the Washington, D.C.-based National Association of Manufacturers, as the Miami meeting was concluding. "The job will be to see that as many channels as possible get into the basic service and that as many countries as possible sign up for the premium channels." Specifically for the auto industry, matching the liberalizing pace of NAFTA, the trilateral trade pact that has linked the United States, Canada, and Mexico since Jan. 1, 1994, "is going to be a tough proposition," contends Gary C. Hufbauer, an economist who is the Reginald Jones senior fellow at the Institute for International Economics (IIE), Washington, D.C. "The auto industry has been the most successful and the big winner" under NAFTA, Hufbauer judges. "There's no other industry [in North America] that comes close in terms of [supply-chain] integration and shipments," he states. In contrast, neither Brazil nor Argentina, South America's two largest economies and part of the MERCOSUR common market, "has been willing to liberalize [autos]." Indeed, "when there has been a macroeconomic crisis in the past three years in both countries [autos has been] the first [industrial sector] they restrict," Hufbauer says. "Given that history, I find it difficult to believe they will completely liberalize with the United States and Mexico in the context of an FTAA very quickly." Meanwhile, both data and anecdotes suggest that the auto industry in North America has benefited from NAFTA -- despite the continued and sometimes charged debate over whether the 10-year-old pact has created employment or cost Americans their jobs. "NAFTA [was] not about moving jobs to Mexico -- or moving production to Mexico," insists William Kelly, director of international governmental affairs at Ford Motor Co., Dearborn, Mich. "NAFTA was all about opening up the Mexican market." Before NAFTA, Mexican rules on products, exports and local content limited what Ford and other U.S. automakers could do in Mexico, he explains. "All that went away under NAFTA." Says Kelly, "One of the interesting things is that since NAFTA began, the Mexican [automotive] market has almost doubled," with new car and light truck sales totaling an estimated 1.04 million units in 2003. A decade of U.S. Commerce Department data tells a similar story. The numbers show that between 1993, the year before NAFTA took effect, and 2002, the value of shipments of new passenger vehicles and light trucks among the U.S. and Canada and Mexico more than doubled to $75.5 billion from $36.5 billion. Not surprisingly, because most automotive trade between the United States and Canada had been liberalized before NAFTA, the statistics show the most dramatic growth was in U.S. automotive exports to Mexico. In 1993, the value of U.S. shipments of new passenger vehicles and light trucks totaled less than $95 million. At the end of 2002, it totaled $3.61 billion, 38 times greater. "Mexico displaced Japan as our second most important international market in 1997, and remains our second most important market today, trailing only Canada," notes an April 2003 U.S. Commerce Department report. "This came about because U.S. firms were able to rationalize and relocate some of their Mexican production to U.S. plants and because they could export more models to Mexico from the U.S. without being subject to artificial import and local production constraints." For Ford, recalls Kelly, "probably the first visible sign of any NAFTA influence" was the shift, shortly after NAFTA took effect, of Mercury Cougar and Ford Thunderbird production from Ford's assembly plant at Cuautitlan near Mexico City to Lima, Ohio, where Ford was already making the cars for the U.S. and Canadian markets. "It never made any sense to have low-volume production of [those] vehicles at Cuautitlan. But it was required by the [previous] Mexican auto decree [for Ford to be able] to sell them in Mexico." For DaimlerChrysler AG, exports from the U.S. to Mexico have risen about 1,300% under NAFTA, and NAFTA is saving the company about $2 billion annually in duties, says Dennis Fitzgibbons, DaimlerChrysler's Washington, D.C.-based director of public policy. Adds Tom France, vice president of managed services and the automotive practice at Vastera Inc., a Dulles, Va.-based provider of trade management products and services, "One of our major customers . . . avoids $1 billion of duties through NAFTA." France believes that nafta's impact has been positive not only for automotive OEMs, but also for suppliers, for the folks that transport products and parts, and for firms such as Vastera. "It has touched all of us and let us grow." Vastera, for example, has developed software that allows companies to keep tabs on the nearly 3,000 auto industry tariff codes that have NAFTA duty rates. Significantly, Vastera's France suggests that benefits for the automotive industry under a free trade area in the Americas are likely to come along faster than IIE's Hufbauer believes. "There are established shipping patterns between Brazil, Mexico, the U.S. [and] Canada -- plus the rail structure is in place [from] Canada all the way down through Mexico." In addition, in the Americas "the customs rules and regulations and [other] trade regulations are forward-thinking and progressive -- and most of the trade is done electronically . . . so that goods are rarely held up because of paperwork and people," something that's critical to JIT inventory management during production in the auto industry, he says. Expansion within the Americas will be "a continued good alternative to going to China," adds Peter Moore, senior vice president in Keybanc Capital Markets' Industrial Group in Cleveland. As car companies are moving to a demand-pull production schedule, "the simple fact that Mexico and these other countries are closer, and they can control [the] supply, has got to be a better situation [for the manufacturers]." Although the data are somewhat dated, Matthew J. Slaughter, an associate professor of business administration at Dartmouth College's Tuck School of Business in Hanover, N.H., reinforces the notion that there's great growth potential for U.S. auto industry trade in the Americas outside the United States, Canada and Mexico. U.S. Commerce Department figures for 1994 show that 61.4% of the sales of U.S. transportation affiliates in Canada -- mostly makers of autos and auto parts -- were exports to the U.S., and 54.8% of the sales of U.S. transportation affiliates in Mexico were to the United States. But exports to the U.S. accounted for only 2.3% of the sales of U.S. affiliates in Central and South America. "It's very clear when you look at these data the nature of production for these firms in the rest of Central and South America in autos is dramatically different from what it is in Mexico and Canada," says Slaughter. "It just has been so costly for these U.S. firms to try to integrate their affiliates in these other parts of Central and South America into these global production networks that they haven't done it," he states. "So when I look at the potential of something like the FTAA, I think a big impact will be the ability of these U.S.-based multinationals to extend their cross-border production networks -- at least in the Western hemisphere -- beyond largely just Canada and Mexico." Meanwhile, existing statistics show the U.S. running a very large deficit with Mexico in passenger cars and light trucks -- US$16.06 billion in 2002, according to U.S. Commerce Department data. But "I don't think that it's accidental or necessarily detrimental," emphasizes John Magnus, a Washington, D.C., partner in the international trade practice at Dewey Ballantine LLP, a New York law firm. "The leading producers in Mexico are GM [General Motors Corp.] and Daimler-Chrysler . . . and if they were not able to bring vehicles in from Mexico and sell them in the United States, you have to ask yourself who then would be making those sales?" he says. "Would those be sales of totally red-white-and-blue cars? Or would they be sales of something else? My guess is they would be sales of something else." South American Freeway Light Vehicle Production (units)

Year Argentina Brazil
1994 393,411 1,245,133
1995 274,608 1,369,681
1996 303,655 1,591,717
1997 435,564 1,780,638
1998 446,972 1,344,815
1999 300,440 1,217,200
2000 336,148 1,514,635
2001 233,449 1,585,569
2002 149,958 1,559,355
2003 169,148 1,580,912
2004 198,629 1,772,326
2005 221,860 1,941,442
2006 245,512 2,146,600
2007 258,471 2,224,371
2008 271,974 2,312,853
Source: J.D. Power and Associates
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