General Motors, Meet NAFTA
General Motors (GM) is one of the “Big 3” US Automotive Manufactures and employs 135,000 people globally. They are truly a global company producing cars that are manufactured and sold all over the world1.
NAFTA, or the North American Free Trade Agreement is an agreement governing trade between the United States, Canada, & Mexico created by President Bush in 1989 and signed into law by President Clinton. When it was passed through congress it had more Republican support then Democratic2.
In the last 20 years, Mexico has been the source of a large growth area for auto suppliers6 and is now home to major assembly lines for many of the major OEM’s including General Motors who makes at least 3 finished vehicles in Mexico3. Because of the freedom of trade provided under NAFTA, North American auto manufacturers have built supply chains that cross borders to capitalize on cheaper labor costs resulting in productivity gains of 6.8B$/year6.
This is a practice that also exists in both the European and Asian automotive Industry6. Under current regulations cars that have at least 62.5% NAFTA country produced parts and can trace the origin of certain key parts to NAFTA countries are not subject to a tariff3. However, many automotive companies increase the NAFTA component percentage by using a system where non-NAFTA material is changed or processed in Mexico and can therefore be counted as a NAFTA originating item3.
A New Leader: A Shift in Policy
Candidate Trump campaigned on the unfairness of NAFTA and often labeled it as a “bad deal” that he planned to renegotiate if elected4. He is attempting to do just that and current reports from the NAFTA recognition meetings, set to resume on November 17th,5 state that the US delegation is asking for the percentage of NAFTA originated parts to be increased to 80% with a much larger list of key parts that must be NAFTA sourced, including steel and leather3. The US also has proposed a so called “Sunset Rule” which would require the three countries to agree to renew the agreement every 5 years5.
The US maintains that if these demands are not met then the US will withdraw from NAFTA, leading to a large amount of unease and uncertainty in a wide variety of industries who deal is cross-border trade5. This is an especially important issue for the Automotive and Automotive Supply Industries which have built large complex supply chains; the US imported 51 billion dollars in vehicles and 23 billion in auto parts in 20163. However, the 33% of US auto parts exported globally, are to Mexico and 36% are to Canada6.
As a result of a recent breakdown in NAFTA renegotiations, executives in a variety of industries are increasing their pressure on Washington to uphold the agreement. GM is represented by the American Automotive Policy Council, which recently participated in a lobbying blitz around support of NAFTA. However, they are not optimistic in their ability to influence, since the final decision on negotiation trade partnerships resides with the executive branch7.
In response to the instability around NAFTA GM has announced the creation of a parts supplier park closer to one of its assembly line in Arlington, Texas. GM admits that the decision was made prior to the election and that they were already concerned about the risks of a global supply chain; including political instability, extreme weather, and the growing national isolation trends8.
Living with Unstable Trade
If NAFTA is overturned or substantially changed then automakers like GM will have to decide if complying with the new stringent controls is worth avoiding a 2.5% tariff on finished vehicles. The cost savings from cheaper Chinese parts may offset the tariff costs3. This would have a giant impact on the automotive parts supply industry which is currently 2.4% of the US GDP6. The Other option that GM has is to pass the price increase onto customers3.
There is a large amount of uncertainty in the political process around NAFTA that will directly impact GM and others involved in the automotive manufacturing industry in North America and around the world. Going Forward GM will have to decide which if any of these approaches it wants to take to ensure that they keep their supply chain as healthy as possible.
- What if anything should GM be doing to lobby support with the President or Congress for retaining NAFTA in its existing form?
- How should GM’s risk tolerance to global events influence their manufacturing plans going forward? Will we see a “re-shoring” of auto parts manufacturing or will they pay the tariff?
 – General Motors Company 10–K , February, 2017.< http://www.gm.com/investors/sec-filings.html>
 – Bown, C. What is NAFTA, and What Would Happen to US Trade Without it, Peterson Institute for International Economics. February 15, 2017. < https://piie.com/commentary/op-eds/what-nafta-and-what-would-happen-us-trade- without-it>
 – Whelan, R. U.S. Pushes Stiffer Content Rules for Nafta Car Makers. The Wall Street Journal. November 9, 2017.<https://www.wsj.com/articles/u-s-pushes-stiffer-content-rules-for-nafta-car-makers-1510228802>
 – @RealDonaldTrump. Twitter. October 19, 2016.< https://twitter.com/realDonaldTrump/status/788914665136922624 >
 – Mauldin, W. Trump’s Nafta Withdrawal Threat Casts Pall Over Business Plans. The Wall Street Journal. November 2, 2017.<https://www.wsj.com/articles/trumps-nafta-withdrawal-threat-casts-pall-over-business-plans-1509641485>
 – The Boston Consulting Group. A World Without NAFTA? A Look at The Future Through the Lens Of The Motor Vehicle Industry. Washington D.C.; 2017.< https://www.mema.org/sites/default/files/A_World_Without_NAFTA_0.pdf >
 – Swanson, A. & Kitroeff, N. ’Army’ of Lobbyists Hits Capitol Hill to Preserve NAFTA, The New York Times. October 24, 2017. <https://www.nytimes.com/2017/10/24/us/politics/nafta-lobby-congress.html>
 – Colias, M & Mauldin, W. GM Expects to Move Supplier Jobs from Mexico to Texas. The Wall Street Journal. June 16, 2017. <https://www.wsj.com/articles/gm-expects-to-move-600-supplier-jobs-from-mexico-to-texas-1497634381>
Photo by Matt Duncan on Unsplash < https://unsplash.com/search/photos/curving >