It seems pretty clear, though, that he’ll try to deliver in some way on one of his most frequently repeated promises: to renegotiate or dismantle the North American Free Trade Agreement (NAFTA).
If he succeeds, that will be a costly headache for Ford Motor Company a, General Motors and just about all of the other big global automakers. Here’s why.
What Trump has promised to do about NAFTA
First, let’s look at what President Trump might try to do. In his 7-point trade plan, Trump said that if elected, he would:
Tell NAFTA partners that we intend to immediately renegotiate the terms of that agreement to get a better deal for our workers. If they don’t agree to a renegotiation, we will submit notice that the U.S. intends to withdraw from the deal. Eliminate Mexico’s one-side backdoor tariff through the VAT and end sweatshops in Mexico that undercut U.S. workers.
Trump also, famously, castigated automakers generally and Ford in particular for building new factories in Mexico and not in the United States. He even suggested that he’d try to enact a 35% tax on vehicles imported from Mexico.
One way or another, it seems clear that Trump will try to end free trade between the U.S. and its southern neighbor. That means (again, if he’s successful) that vehicles coming into the U.S. from Mexico would face a tariff, probably a steep one.
That would disrupt a lot of commerce, and impact a lot of automakers.
There are a lot of vehicles coming into the U.S. from Mexico
Since official reports of exports and imports are tallied in terms of financial value, it can be hard to tell exactly how many cars and trucks are imported into the U.S. from other countries.
But we know there are a lot of them: According to figures from the Mexican Automotive Industry Association, about 79% of the 2.9 million vehicles built in Mexico this year through October were exported. About 86% of those exports, just under 2 million, went to North America, and the vast majority of those were sent to the U.S.
There are more coming: According to a recent report from the Center for Automotive Research (CAR), new factories that are under construction in Mexico will push the country’s total production capacity over 5 million vehicles a year sometime in 2018.
Those factories are getting built because right now, it makes very good business sense for American automakers to build cars and trucks in Mexico and then import them into the U.S.
Why automakers have been building factories in Mexico
The list of auto factories in Mexico is a long one, and it has been growing quickly in recent years. Just since 2014, Mazda, Honda, Volkswagen and Audi, and Hyundai and Kia have all opened plants in Mexico. There are more on the way: Ford, Nissan, BMW, Volvo, and Toyota all have Mexican factories under construction or in the works now. They’ll join GM, Fiat Chrysler Automobiles , and other vehicle manufacturers that have had factories in Mexico for several years.
But why Mexico? Lower-cost labor is part of the story, but there’s quite a bit more to it:
- Free trade with other countries: Thanks to free-trade deals, exports from Mexico are exempt from tariffs in 44 other countries, including the European Union (counted as one “country”), versus just 20 from the United States. That makes it an appealing base for any company that wants to produce goods (global small-car models, for instance) for export.
- Free trade with the U.S. — and easy shipping: One of those 44 countries is the world’s second-largest auto market, the United States. Because it shares a huge border with Mexico, shipping vehicles from Mexican factories to U.S. dealers is relatively simple and inexpensive.
- Lower-cost, but highly qualified, workers: Yes, Mexican workers are paid less, averaging a little over $8 an hour in wages and benefits while their American counterparts make about $46. But they’re also well-qualified: Mexico has made huge strides toward an educated workforce, with over 90,000 engineers and technicians graduating annually.
- Robust existing infrastructure: The number of factories already operating in Mexico means that the country has a rich network of suppliers, logistics firms, and other resources that automakers seek. Mexico also has good deep-water ports on both the Atlantic and Pacific Oceans, facilitating longer-distance exports.
But that business case changes in a hurry if NAFTA goes away and the U.S. imposes tariffs on Mexican-made vehicles.