Impacts of Potential U.S. Trade & Tax Policy Changes
on Automotive Trade Within The Great Lakes Region
Kristin Dziczek Research Director
APRC Conference Toronto 17 March 2017
Today:
• Trump & trade
• NAFTA overview
• Will auto jobs come back to the United States?
• Other U.S. tax & trade policy proposals
• Ontario-Michigan cooperation
TRUMP & TRADE
Trump & Trade
★ FIRST, I will announce my intention to renegotiate NAFTA or withdraw from the deal under Article 2205. ★ SECOND, I will announce our withdrawal from the Trans-Pacific Partnership. ★ THIRD, I will direct the Secretary of the Treasury to label China a currency manipulator. ★ FOURTH, I will direct the Secretary of Commerce and U.S. Trade Representative to identify all foreign trading abuses that unfairly impact American workers and direct them to use every tool under American and international law to end those abuses immediately.
NAFTA OVERVIEW
Brief NAFTA Automotive Trade Facts
Top global vehicle producers:
o U.S. ranks 2nd
o Mexico ranks 7th
o Canada ranks 10th
NAFTA is a desirable global export base for automotive and parts:
o U.S. has free trade agreements (FTAs) (20 countries)
o Mexico has 17 FTAs with individual countries plus the EU (44 countries)
o Canada has 12 FTAs with individual countries plus the EU (40 countries)
40% of U.S. light vehicles exported in 2015 were shipped to NAFTA partners
50% of U.S. light vehicles imported were shipped from NAFTA partners
75% of the value of U.S. automotive parts exports were shipped to NAFTA partners in 2015
(split roughly evenly between Canada and Mexico)
51% of the value of U.S. automotive parts imports came from NAFTA partners in 2015
(U.S. parts imports from Mexico represented three-quarters of these imports.)
Sources: (U.S. INTERNATIONAL TRADE ADMINISTRATION, 2016); (WORLD INPUT-OUTPUT DATABASE, 2016) (WILSON C. E., 2011)
Share of Each Country’s Production That is Sold in the
Same Country, 2015
Source: IHS|Markit
U.S. Automotive Trade with Canada, 2011-2015 Imports and Exports for 3361 and 3363
20152014201320122011
California
20152014201320122011
Ohio
20152014201320122011
Indiana
20152014201320122011
Kentucky
Source: U.S. International Trade Administration
-
10,000,000,000
20,000,000,000
30,000,000,000
40,000,000,000
50,000,000,000
2015 2014 2013 2012 2011
Michigan
U.S. Automotive Trade with Mexico, 2015-2011 Imports and Exports for 3361 and 3363
-
10,000,000,000
20,000,000,000
30,000,000,000
40,000,000,000
50,000,000,000
2011 2012 2013 2014 2015
Michigan
2011 2012 2013 2014 2015
Texas
2011 2012 2013 2014 2015
California
2011 2012 2013 2014 2015
Ohio
2011 2012 2013 2014 2015
Tennessee
Source: U.S. International Trade Administration
North American light vehicle production didn’t change much
with introduction of NAFTA
-
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
U.S., Canada, and Mexico Light Vehicle Production: 1980-2016
U.S. Production Canada Production Mexico Production
Source: Ward’s Automotive
NAFTA
-
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Canada and Mexico Light Vehicle Production: 1980-2016
Canada Production Mexico Production
…but 2009 did change things
Mexican Automotive Wages are One-Eighth to One-Fifth the
Wages Paid to U.S. Hourly Auto & Parts Workers
5.64
2.47
$0
$5
$10
$15
$20
$25
$30
$35
$40
20
07
20
08
20
09
20
10
20
11
20
12
20
13
Motor Vehicles
Parts
27.83
19.91
$0
$5
$10
$15
$20
$25
$30
$35
$40
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
U.S
. D
ollars
/Ho
ur
Motor Vehicles
Parts
Average Hourly Wages for Production and Non-Supervisory Workers in Motor Vehicle and Parts in Current USD, 2007-2013/2014
Sources: U.S. Department of Labor, Bureau of Labor Statistics;
Mexico National Institute of Statistics and Geography (INEGI: Instituto Nacional de Estadística y Geografía); CANSIM
35.37
22.31
$0
$5
$10
$15
$20
$25
$30
$35
$40
20
07
20
08
20
09
20
10
20
11
20
12
20
13
Motor Vehicles
Parts
Mexico is a Global Export Base for Autos and Parts
13 FTAs, 44 Countries North American Free Trade
Agreement (NAFTA)
Colombia - Mexico
Costa Rica - Mexico
European Union - Mexico
Nicaragua - Mexico
Chile - Mexico
EFTA - Mexico
Israel - Mexico
Northern Triangle - Mexico
Uruguay - Mexico
Japan - Mexico
Peru - Mexico
Central America – Mexico
Note: Canada has FTAs with 40 countries; U.S. with 20 countries
Growth of Non-NAFTA Exports from Canada, Mexico & the
United States: 2005-2023
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
4,500,000
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
20
21
20
22
20
23
SHA
RE
OF
NA
FTA
LIG
HT
VEH
ICLE
PR
OD
UC
TIO
N E
XP
OR
TED
BEY
ON
D
NA
FTA
NU
MB
ER O
F LI
GH
TVEH
ICLE
S
From Mexico From United States From Canada Share of NAFTA Production Exported Beyond NAFTA
Source: IHS Markit and Center for Automotive Research
Canada, Mexico & U.S. Light Vehicle Capacity Forecast,
2015-2023
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
16,000,000
2015 2016 2017 2018 2019 2020 2021 2022 2023
UN
ITS
OF
CA
NA
DIA
N &
MEX
ICA
N L
IGH
T V
EHIC
LE C
AP
AC
ITY
UN
ITS
OF
U.S
. LIG
HT
VEH
CIL
E C
AP
AC
ITY
United States Canada Mexico
Source: LMC Automotive
Utilization 95%
94%
98%
Utilization 83%
83%
82%
Every Global Auto Production Region Has a Low-Cost
Source of Materials, Parts & Components
Share of Global Automotive Parts Exports (Total: $363B in 2014)
Source: BACI International Trade Database; Visualization from MIT Economic Complexity Observatory
Automaker Investment Announcements 2009-2016
Source: CAR “Book of Deals”
Total North American Investment Announcements
$116.5 billion
Canada $6.7 billion (6%)
U.S. $85.0 billion (73%)
Michigan $30.3 billion (26% of North America)
Mexico $24.7 billion (21%)
U.S. motor vehicle employment, output & productivity are up;
is it technology, trade, or something else?
0
10
20
30
40
50
60
70
80
-
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
900,000
1,000,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
VEH
ICLE
S (U
NIT
S)
EMP
LOYM
ENT
AN
D V
ALU
E O
F SH
IPM
ENTS
Employment, Value of Shipments & Vehicles/Production Worker
Production/Non-Supervisory Employment Value of Shipments/Production Employee ($) U.S. Production/Assembly Production Employee (units)
Sources: U.S. Bureau of Labor Statistics (employment), Annual Survey of Manufacturers (shipments), Wards Auto (U.S. production)
Rules of Origin Likely to Be a Focus of NAFTA Talks
Source: Center for Automotive Research Analysis; AALA, NAFTA & CAFE Rules & Regulations
• Current ROO = 62.5% • Democrats proposal = 90% • Possible “U.S. Peg”
• “Optical target” vs.
“Hard Target” Tracing and calculation differences
U.S. & Canadian (AALA) Content by Segment
0% 10% 20% 30% 40% 50% 60% 70% 80%
OVERALL
Small Car
Midsize Car
Large Car
Luxury Car
Small CUV
Midsize CUV
Large CUV
Small Pickup
Large Pickup
Small SUV*
Midsize SUV
Large SUV
Van
Sales-Weighted AALA Content Percentages, 2016 Models with NAFTA Production
0% 10% 20% 30% 40% 50% 60% 70% 80%
OVERALL
Small Car
Midsize Car
Large Car
Luxury Car
Small CUV
Midsize CUV
Large CUV
Small Pickup
Large Pickup
Small SUV*
Midsize SUV
Large SUV
Van
Sales-Weighted AALA Content Percentages, 2016 All Models
NAFTA 62.5% ROO
* Only Jeep Wrangler in this segment in 2016.
NAFTA 62.5% ROO
Source: Center for Automotive Research Analysis; AALA and Ward’s Auto.
WILL AUTO JOBS COME BACK
TO THE UNITED STATES?
What Would It Mean to Bring Back Automotive
Manufacturing from Mexico?
Automakers Assume that small cars are produced elsewhere (45% of all Mexico exported vehicles to the U.S.), and that production facilities in Mexico that export to non-U.S. markets remain in Mexico
• Net add: 1 million additional units of U.S. capacity across 10 automakers
• Add 22,200 total automotive manufacturing related employees (17,640 hourly)
• New capacity investments would amount to an estimated $4.7B to $6.5B (CAR analysis due to current capacity utilization @94%)
• Costs could go higher—added U.S. capacity spread across 10 automakers
http://www.cnn.com/2012/10/31/us/mexico-border-jeep/
What Would It Mean to Bring Back Auto Parts
Manufacturing from Mexico?
Suppliers • Canada: largest export market for U.S. automotive parts
($22.0B); Mexico: a close second ($20.2B)
• 19 % of Mexico suppliers are U.S.-based (18% Japanese, 12% Germany)
• Mexico’s auto supply industry employed just over 500,000 people in 2015 (460,000 hourly)
• Cannot determine what is OE/Aftermarket
• Potential to move back: JIT plants and other bulky, fragile, or otherwise difficult to ship parts and components
0% 20% 40% 60% 80% 100%
Engines & engine parts
Transmission & powertrain parts
Electrical & electronic equipment
Steering & suspension parts
Seating & interior trim
Brake systems
Automotive lighting equipment
Parts not elsewhere specified or included
U.S. Automotive Parts Imports by System, 2015
Mexico Canada Rest of World
Source: U.S. International Trade Administration
Reason #1 for pessimism: Talent
3.7
0
50
100
150
200
250
300
350
0
2
4
6
8
10
12
14
16
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
UN
EMP
LOYE
D IN
TH
OU
SAN
DS
UN
EMP
LOYM
ENT
RA
TE
Unemployment Rates, 2000-2016
# of Unemployed Transp. Equip. Unemp. Rate U.S. Unemp. Rate
Source: Current Population Survey, Bureau of Labor Statistics
3,055,000
3,780,000
5,550,000
CY2017 CY2018 CY2019
Estimated Tooling Workload Hours Based on FCA, Ford & GM Planned Major/Minor Product
Changes
Reason #2 for pessimism: It’s a truly global industry
If trade policy targets only Canada &/or Mexico, other countries will gain…
These countries are the top importers of parts, materials & machinery to the U.S.
8
11
12
5
18
9
2
5
4
1
7
6
2
12
7
5
7
6
16
2
8
23
6
31
1
1
4
4
1
H O N D A
F C A
F O R D
N I S S A N
G M
T O Y O T A
North America South America Europe Asia Africa
Total Plants Outside of North America:
44
20
24
33
20
20
Global Locations of Top Six Automakers by Region, 2016
China Japan Germany
Canada South Korea Philippines Taiwan
UK Hong Kong Belgium
Netherlands France Italy
Source: U.S. International Trade Commission/Ward’s Automotive
Reason #3 for pessimism: We are at or near market peak
10.8
8.7
5.7
7.7
8.7
10.4 11.1
11.7 12.1 12.1 12.2 12.2 12.1 11.8
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
CAR U.S. Vehicle Production Forecast: 2016-2020
*Includes heavy duty trucks. Source: Ward’s Auto; CAR Research, October 2016
OTHER US TRADE & TAX POLICY
PROPOSALS
35% Tariff With Mexico:
Lower U.S. Sales Volume & Higher Prices
• Total 37,700 jobs lost minimum from 35% tariff
– 450,000 fewer unit sales in U.S. (Implied loss of 6,700 U.S. assembly jobs)
– In 2015, Mexican vehicle exports contained an average of 40.3 percent U.S. content (U.S. parts employment impact tied to parts & components adds another 20,000 U.S. parts jobs)
– U.S. vehicle production contains an average of 11.7 percent Mexican content (add another 11,000 U.S. assembly jobs)
• There are two factors that could raise the jobs impact even further:
– Parts and components cross the U.S.-Mexico border multiple times; taxing at each border crossing would multiply the impact of the tariff
– Job losses would not be evenly distributed and would impact individual automakers’ and suppliers’ capacity utilization (plant closures and broader job impacts)
Border Adjustment Tax is Part of Several
Comprehensive Corporate Tax Reform Proposals
A Better Way: Our Vision for a Confident America • Lowers the effective corporate tax rate from 35 to 20 percent (Trump’s tax plan lowers the rate to 15
percent).
• Provides full and immediate depreciation for investments (tangible and intangible), which results in a
zero percent tax rate on new investment.
• Cuts individual taxes on dividends and capital gains in half.
• Repeals the corporate alternative minimum tax (AMT).
• Eliminates most special tax deductions and credits.
• Includes and improves tax credits for domestic R&D.
• Ends the deduction for net income expense (can deduct interest expense against interest income and
carry forward net income expenses).
• Includes a 100 percent exemption on repatriated profits from foreign subsidiaries.
• Implements the Border Adjustment Tax (BAT)
At this time, no legislation has been introduced
Border Adjustment Tax:
Estimated Impact on U.S. Light Vehicle Prices
Methodology:
• Based on confidential financial data received from automakers representing over 50 percent of U.S. light vehicle sales
• Exchange rates constant; examined only a price response to the implementation of border adjustment
• Estimates of consumer price changes are based on: • Vehicle manufacturers’ change in effective taxable
income • Changes in auto manufacturers’ input costs from
the automotive parts sector • No change in unit sales or domestic production • No shifts in sourcing or production investments
Immediate responses to border adjustment:
• Automotive parts and material prices would increase by 8.4 percent
• U.S. light vehicle prices would increase 5.6 percent
• Average per vehicle price increases are estimated at $1,970
• Given 2016 U.S. sales at 17.5 million, the price increase represents an aggregate $34.6 billion in higher costs to consumers
𝑅𝐷 − 𝐶𝐷 = 𝑇𝑎𝑥𝐵𝑎𝑠𝑒𝐵𝐴𝑇
𝑅𝐷 + 𝑅𝐸 − 𝐶𝐷 + 𝐶𝐼 = 𝑇𝑎𝑥𝐵𝑎𝑠𝑒
Potential Obstacles to Implementing BAT
• International acceptance of, and reactions to, the adoption of a DCFT is an open question:
– Is the DCFT a consumption tax, like the VATs employed in other countries, or
– Is it an income tax?
• Will other countries
– File objections with WTO?
– Enact retaliatory measures?
ONTARIO-MICHIGAN COOPERATION
Greater Cooperation Between Ontario & Michigan
MOU recognizes mutual benefit from strong regional auto industry
• Concern about continued production (GM-Oshawa, FCA-Brampton & Warren)
• Continued improvement in border wait times— seamless supply chain
• Regional talent • Cooperation in skilled trades/TDM • Connected/automated vehicle technologies