Nafta: Why the US car industry is trapped in Trump’s trade crossfire
The Toyota Tundra looks every inch the all-American truck, but even it risks falling foul of rules touted by the Trump administration
Shawn Donnan in San Antonio, Texas
Blunt-nosed, broad-shouldered and towering on 20-inch chrome wheels, the latest Toyota Tundra roars to life as it turns into the final station of tweaks and checks that will wrap up a 20-hour journey down the production line. Polished to a sparkle by the robots in the paint shop, the pick-up truck has a swagger worthy of its birthplace, a 2.2m square foot state-of-the art factory emerging from the scrub of a former cattle ranch just a 25-minute drive from the Alamo, spiritual birthplace of Texas.
“When we decided we wanted to build a pick-up truck we thought where better than Texas,” says Mario Lozoya, a former Marine sergeant and line supervisor who handles external relations for Toyota in the Lone Star State.
But the Tundra is also an example of how international supply chains and business investments come up against global trade rules and how President Donald Trump’s vision of the American economy is already helping to reshape the global economy even as the world nervously eyes the prospect of a US-China trade war.
Like every other car produced on the continent the Tundra sits in the crossfire of Mr Trump’s plans to renegotiate the North American Free Trade Agreement. The US hopes there will be a deal in the weeks to come, but the prickliest issue by far in Washington’s discussions with Canada and Mexico is over how and where vehicles should be made.
The Trump camp argue that Nafta’s current rules, which require 62.5 per cent of a vehicle to be made in North America in order to qualify for the tariff-free trade the pact enshrines, have fuelled the relocation of much of the US auto industry to Mexico, costing thousands of American manufacturing jobs. They have proposed lifting that threshold to as much as 85 per cent and requiring a 50 per cent US-production quota for vehicles sold in the US, by far the region’s largest auto market.
Almost 130,000 Toyota Tacoma's are built at the Texas plant but more are produced across the border in Mexico © Company
Such a move, the US auto industry argues, would hurt its global competitiveness by removing its ability to access cheap labour in Mexico much as the German car industry does in eastern Europe or Japan does in China. It has also added an unwelcome distraction.
“[Preparing for a new Nafta] takes [executive] time away from other stuff,” says Bruce Belzowski, managing director of the University of Michigan’s Automotive Futures group. “They could be doing R&D on electric vehicles if they didn’t have to worry about what to do with their supply chains.”
The Tundra looks like an all-American beast of a truck. And yet its story is heavily global: its bodywork is stamped out of US steel at the Texas plant, its 5.7-litre V8 engine is built at a Toyota factory in Alabama, but it all sits on a frame shipped in from Mexico.
According to the National Highway Transportation Safety Administration 65 per cent of the Tundra’s components — exceeding Nafta content rules — originated in the US or Canada. Yet even it risks falling short of the 85 per cent threshold that Mr Trump’s top trade negotiator, Robert Lighthizer, has been seeking, raising questions about how Toyota might have to reconfigure its supply chains to meet the higher quota.
Canada and Mexico, both of which have their own politically influential motor industries, have resisted the US demands. The result has been a search for compromises ranging from how to include research and development costs (most of which are in the US) to how to account for the higher salaries paid to US autoworkers compared to their Mexican counterparts.
Production values
A Toyota Tacoma pick-up truck moved through final inspection at the company's plant in San Antonio, Texas © Bloomberg
8.5% Of the $17.5tn global annual trade in goods is made up by vehicles and auto parts
62.5% Of a vehicle has to be made in North America to qualify for tariff-free status in the Nafta region . . .
85% . . . but a proposal from the Trump administration would see that figure rise to as much as 85%
The discussion has led major producers to freeze investment decisions and Mr Trump to hail moves by companies like Ford to shift production to the US. “We can negotiate forever,” he said last week. “Because as long as we have this negotiation going, nobody is going to build billion-dollar plants in Mexico.”
The Trump administration has already altered the path of globalisation in a way likely to be felt for decades, by abandoning the move towards bigger regional blocs.
Vehicles and auto parts account for 8.5 per cent of the $17.5tn worldwide annual trade in goods and since the 1990s the industry has become dependent on global just-in-time supply chains.
That scale helps explain why Mr Trump, when he vents his trade frustrations, often focuses on the gap between the 2.5 per cent levy charged by the US on imported passenger cars and higher tariffs in the EU or China as he did last week when he pointed to the corresponding 25 per cent Chinese tariff in a tweet.
Xi Jinping, China’s president, a day later used a high-profile speech to reiterate an offer to lower China’s auto tariffs. He hinted that Beijing could revisit investment restrictions that force foreign carmakers into joint ventures with Chinese counterparts to enter what is now the world’s largest auto market.
The international trade in cars has long been governed not just by tariffs but by a jumble of pacts like Nafta. Rules of origin, as well as safety and other regulations, present further barriers to trade.
Before Mr Trump entered the White House the world was on a path toward a significant reduction of those regulatory barriers and the introduction of far-broader regional trade rules that would have boosted the global market in cars.
The Trans-Pacific Partnership with Japan and 10 other economies, including Canada and Mexico, was negotiated by his predecessor Barack Obama. It would have established new content rules across not just Nafta but almost 40 per cent of the global economy. It would also have liberalised the trade in cars between two of the world’s three largest economies, eventually putting big Japanese carmakers like Toyota and Honda and US counterparts like GM and Ford under the same set of trade rules wherever they operated in the bloc.
Mr Trump made pulling out of the TPP one of his first acts in office, though he last week raised the possibility of rejoining. His administration has also frozen talks over a pact with the EU that would have had a similar impact.
Among the biggest areas of focus in the so-called Trans-Atlantic Trade and Investment Partnership, which would have covered almost half the global economy, was finding a way to lower regulatory barriers for cars. These ranged from the colour of headlights to regulating emissions that most in the industry argue are a far greater barrier to transatlantic trade than tariffs.
President Donald Trump shows the executive order that withdraws the US from the Trans-Pacific Partnership © Getty Images
US and European officials considered the pact a way to solidify transatlantic standards and counter a rising China with ambitions to dominate emerging areas like electric vehicles as part of Mr Xi’s “Made in China 2025” plan. By building a stronger transatlantic market, the argument went, both European and US carmakers would be in a better place to repel the competition from emerging Chinese rivals.
By abandoning the TPP and suspending the discussions with the EU Mr Trump has ceded the US’s ability to lead efforts to set the global rules for things like the auto industry, critics argue.
Yet his desire and effort to put the brakes on globalisation has not stopped the push for greater economic integration. It has just scrambled the roles of the actors, argues Philip Levy, who advised former president George W Bush on trade policy.
“All the fundamental forces that were there before are still there,” says Mr Levy who adds that the EU and others have started taking the lead, building the de facto networks of economies that come out of trade agreements.
The US is still finding ways to make its influence felt. EU talks with Mexico to update their existing trade agreement have stalled, largely due to uncertainty surrounding Nafta. But the EU and Japan last year concluded negotiations on a trade deal that will cover a third of the global economy and reinforce the lead in the Japanese market that European carmakers have over US rivals.
“That momentum is going to continue,” Mr Levy says. “The problem for the US is that if we continue taking President Trump’s approach we’ll just be sitting on the sidelines.”
The fact Toyota is producing the Tundra in Texas is the result of a longstanding US trade barrier that Mr Trump has embraced as part of his greater adventures in protectionism. “I’m here to protect,” the president told a news conference in March as he defended new tariffs on steel and aluminium imports. “I’m protecting our workers. I’m protecting our companies.”
As Mr Trump keeps pointing out, the US tariff on passenger car imports is low at 2.5 per cent but the tariff on light trucks has remained as high at 25 per cent since the 1960s. That has helped protect domestic producers from competition in a lucrative part of the US auto market where one in six of the more than 17m new vehicles sold last year were pick-up trucks like the Tundra.
It has also forced foreign manufacturers like Japan’s Toyota to produce pick-up trucks in the US. When the US and South Korea announced that they had reached an agreement in principle last month to rewrite their 2007 trade deal the main concession that the Trump administration extracted was a 20-year extension on the 25 per cent tariff on light trucks, thereby protecting US-based carmakers from a possible assault from Korean rivals like Hyundai.
The benefit of forcing overseas carmakers to build factories in the US, the Trump administration argues, is the securing of American jobs like the 7,000 at Toyota’s Texas plant.
Donald Trump's trade representative, Robert Lighthizer © EPA
The first version of the Toyota Tundra came off a production line in Indiana in 1998 and manufacturing was moved to Texas in 2003. Last year, the Texas plant, where robots do 90 per cent of the welding and autonomous vehicles ferry parts to the assembly line, produced more than 136,000 Tundras and more than 129,000 of the smaller Tacomas, with the trucks coming off its assembly line at the rate of one a minute.
Many of the suppliers that work out of Toyota’s Texas plant are the product of international partnerships with local entrepreneurs. One of the biggest, Avanzar, which provides most of the interiors for both the Tundra and the Tacoma, is a joint venture between Michigan-based Adient, the world’s largest car seat-maker, and Shanghai-based Yangfeng Automotive and a San Antonio-based company. In addition, many of the Texas suppliers work with another Toyota plant in Mexico, adding to their reliance on Nafta.
For Frank DuBois, a business professor at American University in Washington DC, who publishes an annual Made in America auto index, globalisation has turned determining the origin of parts in cars into “an accounting nightmare”.
The complexity of 21st century auto supply chains, with up to 15,000 individual parts going into a single car, highlights another reality. With his quest to rewrite the rules for the auto industry Mr Trump appears to be tilting at windmills, Mr DuBois says, particularly in an era where factories are increasingly automated and even nationalist voters are willing to embrace foreign brands.
“I see a hell of a lot of Trump stickers on Toyota pick-up trucks,” Mr DuBois says. “Trump is living in this antiquated view of auto manufacturing where it is a lot of Joe Lunch Boxes going to work every morning and operating a piece of machinery . . . Those days are gone.”
Nafta talks open the way to a Trump trade win
Donald Trump’s bid to launch a trade war against China may be dominating headlines but in his quieter efforts to renegotiate the North American Free Trade Agreement may lie his first major trade success.
After threatening repeatedly to pull the US out of the 24-year-old agreement the indications are that Mr Trump is nearing at least a preliminary deal with Canada and Mexico.
A similar “agreement in principle” with South Korea announced in March saw another trade pact that the president had threatened to rip up survive with what in the end amounted to relatively minor tweaks.
But Nafta is a bigger beast. The US’s $1.1tn in trade with Canada and Mexico last year was almost twice its trade with China and 10 times that with South Korea.
The Nafta renegotiation had an acrimonious start last August and plenty of barbs have been traded since. In recent weeks, however, the talks have accelerated becoming more focused on securing at least the broad outlines of a deal — including the stricter auto content rules, a rewriting of Nafta’s dispute provisions and a review of the pact every five years — before Mexican elections in July.
Mr Trump continues to argue that he would rather pull out of Nafta and negotiate something from scratch but he has bowed to pressure from his own Republican party and business not to do something so disruptive.
“We’re going to make it great. And we’re getting pretty close to a deal,” the president said last week in a meeting with farm state politicians. “It could be three or four weeks. It could be two months. It could be five months. I don’t care.
“In fact, if everybody in this room closed their ears, I’d say I’d rather terminate Nafta and make a brand new deal, but I’m not going to do that because I want everyone to be happy in this room, OK?”
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