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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
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Page 1: Impacts of Potential U.S. Trade & Tax Policy Changes on ......Small SUV* Midsize SUV Large SUV Van Sales-Weighted AALA Content Percentages, 2016 All Models NAFTA 62.5% ROO * Only Jeep

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

Page 2: Impacts of Potential U.S. Trade & Tax Policy Changes on ......Small SUV* Midsize SUV Large SUV Van Sales-Weighted AALA Content Percentages, 2016 All Models NAFTA 62.5% ROO * Only Jeep

Today:

• Trump & trade

• NAFTA overview

• Will auto jobs come back to the United States?

• Other U.S. tax & trade policy proposals

• Ontario-Michigan cooperation

Page 3: Impacts of Potential U.S. Trade & Tax Policy Changes on ......Small SUV* Midsize SUV Large SUV Van Sales-Weighted AALA Content Percentages, 2016 All Models NAFTA 62.5% ROO * Only Jeep

TRUMP & TRADE

Page 4: Impacts of Potential U.S. Trade & Tax Policy Changes on ......Small SUV* Midsize SUV Large SUV Van Sales-Weighted AALA Content Percentages, 2016 All Models NAFTA 62.5% ROO * Only Jeep

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.

Page 5: Impacts of Potential U.S. Trade & Tax Policy Changes on ......Small SUV* Midsize SUV Large SUV Van Sales-Weighted AALA Content Percentages, 2016 All Models NAFTA 62.5% ROO * Only Jeep

NAFTA OVERVIEW

Page 6: Impacts of Potential U.S. Trade & Tax Policy Changes on ......Small SUV* Midsize SUV Large SUV Van Sales-Weighted AALA Content Percentages, 2016 All Models NAFTA 62.5% ROO * Only Jeep

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)

Page 7: Impacts of Potential U.S. Trade & Tax Policy Changes on ......Small SUV* Midsize SUV Large SUV Van Sales-Weighted AALA Content Percentages, 2016 All Models NAFTA 62.5% ROO * Only Jeep

Share of Each Country’s Production That is Sold in the

Same Country, 2015

Source: IHS|Markit

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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

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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

Page 10: Impacts of Potential U.S. Trade & Tax Policy Changes on ......Small SUV* Midsize SUV Large SUV Van Sales-Weighted AALA Content Percentages, 2016 All Models NAFTA 62.5% ROO * Only Jeep

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

Page 11: Impacts of Potential U.S. Trade & Tax Policy Changes on ......Small SUV* Midsize SUV Large SUV Van Sales-Weighted AALA Content Percentages, 2016 All Models NAFTA 62.5% ROO * Only Jeep

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

Page 12: Impacts of Potential U.S. Trade & Tax Policy Changes on ......Small SUV* Midsize SUV Large SUV Van Sales-Weighted AALA Content Percentages, 2016 All Models NAFTA 62.5% ROO * Only Jeep

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

Page 13: Impacts of Potential U.S. Trade & Tax Policy Changes on ......Small SUV* Midsize SUV Large SUV Van Sales-Weighted AALA Content Percentages, 2016 All Models NAFTA 62.5% ROO * Only Jeep

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

Page 14: Impacts of Potential U.S. Trade & Tax Policy Changes on ......Small SUV* Midsize SUV Large SUV Van Sales-Weighted AALA Content Percentages, 2016 All Models NAFTA 62.5% ROO * Only Jeep

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%

Page 15: Impacts of Potential U.S. Trade & Tax Policy Changes on ......Small SUV* Midsize SUV Large SUV Van Sales-Weighted AALA Content Percentages, 2016 All Models NAFTA 62.5% ROO * Only Jeep

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

Page 16: Impacts of Potential U.S. Trade & Tax Policy Changes on ......Small SUV* Midsize SUV Large SUV Van Sales-Weighted AALA Content Percentages, 2016 All Models NAFTA 62.5% ROO * Only Jeep

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%)

Page 17: Impacts of Potential U.S. Trade & Tax Policy Changes on ......Small SUV* Midsize SUV Large SUV Van Sales-Weighted AALA Content Percentages, 2016 All Models NAFTA 62.5% ROO * Only Jeep

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)

Page 18: Impacts of Potential U.S. Trade & Tax Policy Changes on ......Small SUV* Midsize SUV Large SUV Van Sales-Weighted AALA Content Percentages, 2016 All Models NAFTA 62.5% ROO * Only Jeep

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

Page 19: Impacts of Potential U.S. Trade & Tax Policy Changes on ......Small SUV* Midsize SUV Large SUV Van Sales-Weighted AALA Content Percentages, 2016 All Models NAFTA 62.5% ROO * Only Jeep

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.

Page 20: Impacts of Potential U.S. Trade & Tax Policy Changes on ......Small SUV* Midsize SUV Large SUV Van Sales-Weighted AALA Content Percentages, 2016 All Models NAFTA 62.5% ROO * Only Jeep

WILL AUTO JOBS COME BACK

TO THE UNITED STATES?

Page 21: Impacts of Potential U.S. Trade & Tax Policy Changes on ......Small SUV* Midsize SUV Large SUV Van Sales-Weighted AALA Content Percentages, 2016 All Models NAFTA 62.5% ROO * Only Jeep

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/

Page 22: Impacts of Potential U.S. Trade & Tax Policy Changes on ......Small SUV* Midsize SUV Large SUV Van Sales-Weighted AALA Content Percentages, 2016 All Models NAFTA 62.5% ROO * Only 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

Page 23: Impacts of Potential U.S. Trade & Tax Policy Changes on ......Small SUV* Midsize SUV Large SUV Van Sales-Weighted AALA Content Percentages, 2016 All Models NAFTA 62.5% ROO * Only Jeep

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

Page 24: Impacts of Potential U.S. Trade & Tax Policy Changes on ......Small SUV* Midsize SUV Large SUV Van Sales-Weighted AALA Content Percentages, 2016 All Models NAFTA 62.5% ROO * Only Jeep

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

Page 25: Impacts of Potential U.S. Trade & Tax Policy Changes on ......Small SUV* Midsize SUV Large SUV Van Sales-Weighted AALA Content Percentages, 2016 All Models NAFTA 62.5% ROO * Only Jeep

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

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OTHER US TRADE & TAX POLICY

PROPOSALS

Page 27: Impacts of Potential U.S. Trade & Tax Policy Changes on ......Small SUV* Midsize SUV Large SUV Van Sales-Weighted AALA Content Percentages, 2016 All Models NAFTA 62.5% ROO * Only Jeep

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)

Page 28: Impacts of Potential U.S. Trade & Tax Policy Changes on ......Small SUV* Midsize SUV Large SUV Van Sales-Weighted AALA Content Percentages, 2016 All Models NAFTA 62.5% ROO * Only Jeep

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

Page 29: Impacts of Potential U.S. Trade & Tax Policy Changes on ......Small SUV* Midsize SUV Large SUV Van Sales-Weighted AALA Content Percentages, 2016 All Models NAFTA 62.5% ROO * Only Jeep

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

Page 30: Impacts of Potential U.S. Trade & Tax Policy Changes on ......Small SUV* Midsize SUV Large SUV Van Sales-Weighted AALA Content Percentages, 2016 All Models NAFTA 62.5% ROO * Only Jeep

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?

Page 31: Impacts of Potential U.S. Trade & Tax Policy Changes on ......Small SUV* Midsize SUV Large SUV Van Sales-Weighted AALA Content Percentages, 2016 All Models NAFTA 62.5% ROO * Only Jeep

ONTARIO-MICHIGAN COOPERATION

Page 32: Impacts of Potential U.S. Trade & Tax Policy Changes on ......Small SUV* Midsize SUV Large SUV Van Sales-Weighted AALA Content Percentages, 2016 All Models NAFTA 62.5% ROO * Only Jeep

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

Page 33: Impacts of Potential U.S. Trade & Tax Policy Changes on ......Small SUV* Midsize SUV Large SUV Van Sales-Weighted AALA Content Percentages, 2016 All Models NAFTA 62.5% ROO * Only Jeep

Thank you

Kristin Dziczek

[email protected]


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