Cheap labor v. free trade: why do automakers really do business in Mexico?

Cheaper labor is only one reason Mexico has seen a surge in new-car production. While the country’s low wages have been the big attraction, one of its key advantages is that it has trade agreements with 44 countries, giving automakers access to half the global car market tariff-free. The U.S. has similar trade deals with just 20 countries, which make up 9 percent of global car sales, according to the Center for Automotive Research in Ann Arbor, Michigan.

Make no mistake, the majority of Mexico’s auto exports are still sent tariff-free to the U.S. and Canada under Nafta. Mexico sends 2 million cars a year to the U.S., more than half its total production. But those shipments are making up less of Mexico’s total exports. By 2018, 28 percent of Mexico’s production will be exported to countries besides the U.S. and Canada, up from about 18 percent in 2015.

Less than 10 percent of U.S. production is sent offshore because American plants tend to make more expensive vehicles that car buyers in emerging markets can’t afford, and because Mexico’s trade deals have increasingly made the country a center for export.

In particular, Canada and Mexico now have a new way to push back against U.S. demands that more auto components be built in the United States. Under current NAFTA rules, 62.5 percent of vehicle parts for cars sold under the pact have to come from one of the three countries in the trade pact. The Trump administration, which blames NAFTA for U.S. job losses, wants to rewrite the deal so that fully half of all automotive components come from the United States alone, to the disadvantage of Canada and Mexico. (Even the U.S. auto industry opposes Trump’s plan because it would upend existing supply chains.)

The revived TPP includes less restrictive — not more restrictive — rules on where automotive components can be made. Since both Canada and Mexico are in that pact, they’d be hard-pressed to adopt different rules just to deal with the United States.

“The Trump administration has badly miscalculated the leverage it has in terms of rules of origin,” said Phil Levy“The Trump administration has badly miscalculated the leverage it has in terms of rules of origin,” said Phil Levy, a senior fellow at the Chicago Council on Global Affairs.

Joining the revived TPP means Mexico, heavily dependent on trade with the United States, now has other options, said Antonio Ortiz-Mena, the former head of economic affairs at the Mexican Embassy in Washington and now a senior vice president at Albright Stonebridge Group.

Turtleneck wrote:We all know the argument: labor is cheap in Mexico, American companies relocate to take advantage of the cheap labor, American workers suffer. What if that argument was flawed? What if it is not cheap labor but instead Mexico's free trade agreements with other countries? According to this Bloomberg article:

Cheaper labor is only one reason Mexico has seen a surge in new-car production. While the country’s low wages have been the big attraction, one of its key advantages is that it has trade agreements with 44 countries, giving automakers access to half the global car market tariff-free. The U.S. has similar trade deals with just 20 countries, which make up 9 percent of global car sales, according to the Center for Automotive Research in Ann Arbor, Michigan.

While labor is cheaper in Mexico, the article claims shipping from Mexico is so difficult - underdeveloped infrastructure to get the cars from the plant to transport - it negates much of the advantage provided by labor costs. Overall, the article claims companies save $4300 per vehicle made in Mexico. The biggest savings come in the form of tariff free trade with foreign countries.




Unless we can match those trade deals, what incentive do automakers have to relocate to the U.S.? As noted in the other thread, it's possible the more technical jobs will remain in the U.S. because of the more skilled labor force. The article says as much, but overall makes a very interesting point: what makes Mexico more attractive is not labor costs but instead its free trade agreements.

Make no mistake, the majority of Mexico’s auto exports are still sent tariff-free to the U.S. and Canada under Nafta. Mexico sends 2 million cars a year to the U.S., more than half its total production. But those shipments are making up less of Mexico’s total exports. By 2018, 28 percent of Mexico’s production will be exported to countries besides the U.S. and Canada, up from about 18 percent in 2015.

Less than 10 percent of U.S. production is sent offshore because American plants tend to make more expensive vehicles that car buyers in emerging markets can’t afford, and because Mexico’s trade deals have increasingly made the country a center for export.