ANN ARBOR, MI – For more than a century, the economy of this region has been tied to the auto industry, an industry that went through a near-death experience a decade ago.
The auto world escaped another seismic shock earlier this month, when President Trump backed down on his threat to impose steep tariffs on Mexico – though possibly just temporarily.
But what is the real health of the industry that put the world on wheels – and turned Michigan and much of the Midwest into a manufacturing powerhouse? And what does its future hold?
Possibly the person best equipped to answer that question is Kristin Dziczek, vice-president of Industry, Labor and Economics at CAR, the Ann Arbor- based Center for Automotive Research.
The daughter of a working-class family in Flint, she has near-matchless credentials, with university degrees in Economics, Industrial Operations Engineering and Public Policy; she’s also worked for two congressmen and the United Auto Workers union.
Her verdict is that the industry is alive and well, with no major recession on the near horizon, but major changes looming ahead.
She has strong roots in the domestic auto industry, noting with a laugh that “where I grew up – in Flint in the 1960s, if it wasn’t made by General Motors, it wasn’t an American car!”
But not only is that no longer the case, it is now very hard to say what is, and isn’t, an ‘American’ car. “The vehicles that we are buying have a lot of parts made in other countries,” she said.
Guess which vehicle has the largest percentage of American-made parts? The Acura MDX crossover, with 76 percent, which is made in Ohio; with other Acuras and Hondas close behind.
“I know a lot of folks think it is still a foreign car, because it’s not union-made. But it is made in the United States,” she said.
Today’s reality is that it is really an international industry, and that trying to impose protectionist tariffs or otherwise decouple the U.S. auto industry from Canada and Mexico might be more difficult than separating conjoined twins – and at least as risky.
President Trump, who canceled new tariffs on Mexican vehicles after an immigration agreement was announced, has said he still might impose them, if the number of undocumented immigrants doesn’t decline sufficiently over the next three months.
But if he does that, Dziczek thinks it would likely hurt the American consumer without affecting what Mexico does. “If they did get to the 25 percent tariff Trump mentioned, we estimate it would add $1,100 to the price of a General Motors car assembled in the U.S,” she said, “and $5,400 to one built in Mexico. The distinction, however, isn’t nearly as clear as that. “Not only do around 40 percent of our motor vehicle parts come from Mexico, about 40 percent of American auto parts go to Mexico,” she added.
Mexican politicians see tariffs as short-term political actions, she said, and they are unlikely to greatly change their policies as a result. That doesn’t mean President Trump and other critics don’t have some legitimate grievances against Mexico.
“They promised when the original NAFTA (North American Free Trade Agreement) was signed in 1994 that it would cause Mexican auto industry wages to rise. This really hasn’t happened.”
However, a scalpel usually works better than an axe. Normally, it wouldn’t be possible to impose tariffs on Mexico and Canada, because our three countries are essentially a free trade zone under NAFTA. But President Trump could get around this by invoking his declaration of national emergency over what he said was a crisis at the border. Congress voted to end the emergency declaration, but were unable to override the President’s veto, and so he apparently has the power to use emergency powers for economic sanctions.
But what about the “new NAFTA,” otherwise known as USMCA,” for United States-Mexico-Canada agreement?
While all three nations have agreed to this treaty, it has to be ratified by the U.S. Senate. And there’s no sign that’s likely to happen soon, Dziczek said. “There are some good things in it. There are higher U.S. and Canadian content requirements, and that could mean a few more American jobs,” she said.
NAFTA was, all concede, in need of updating. The original treaty was concluded when the internet was still in its infancy, and on-line commerce was virtually non-existent. Other technology has also changed radically, and needed addressing.
The “new NAFTA” sets carefully negotiated rules for all those things. But there are some provisions involving labor that Democrats object to, and a few that Republicans may not be too sure of.
Treaties can’t be modified by the Senate; they have to be voted up or down, (“all or nothing,” as Dziczek put it) and the closer the next election gets, the less likely it is that politicians will approve anything complex and controversial. They could ask for modifications, but that would involve opening up negotiations with two other nations with their own political issues.
What happens if the USMCA is never approved?
Technically, the old NAFTA would remain in force. Trump has, however threatened to withdraw from it, “but that doesn’t mean all its provisions would be undone,” she told me, adding that he might find a way to use trade law to suspend some, but not all of the treaty.
The bottom line, however, is that it would be extremely difficult to undo NAFTA, and when it came to the idea of separating the American and Canadian auto industries, “I don’t think you can.”
But where is the U.S. auto industry likely going in the short and medium-term future? And what’s likely to happen when the UAW attempts to negotiate new contracts with management this fall?
More on that next week.
