Executive Briefings

Trump's Nafta Victory Rides on Big Changes to How Cars Are Built

To President Donald Trump, America's $500bn trade deficit is a symbol of economic weakness. If he wants a revamped North American Free Trade Agreement to shrink that number, he'll need a seismic shift in how cars are made on the continent.

Trump's Nafta Victory Rides on Big Changes to How Cars Are Built

With negotiations expected to start in August, makers of everything from toys to microchips are making their case for how the Trump administration should reshape the 23-year-old trade accord with Mexico and Canada. Based on the president's zeal for reducing the deficit, the auto industry could hold the key to U.S. success in the talks. Trump has threatened to walk away from Nafta if he can’t get better terms.

The U.S. had a $63bn trade deficit with Mexico last year, compared with a surplus of $7.7bn with Canada. The automotive trade deficit with Mexico was $74bn. In other words, if you took out trade in cars and car parts over America’s southern border, the U.S. would actually be running a trade surplus with Mexico.

Most of the world's biggest automakers have set up assembly plants in Mexico, taking advantage of wages that are significantly cheaper than in the U.S. Traditional U.S. automakers still do much of their advanced design work and research and development in the Detroit area. By taking advantage of the comparative advantages of each country, automakers have behaved much as trade textbooks would have predicted when Nafta was born in 1994.

Yet the offshoring of assembly work has contributed to the steady decline in manufacturing jobs in America, a trend to which some Rust Belt communities are still struggling to adapt. During the election, Trump's promise to take a hard line on trade appealed to people who feel they've been left behind by globalization.

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With negotiations expected to start in August, makers of everything from toys to microchips are making their case for how the Trump administration should reshape the 23-year-old trade accord with Mexico and Canada. Based on the president's zeal for reducing the deficit, the auto industry could hold the key to U.S. success in the talks. Trump has threatened to walk away from Nafta if he can’t get better terms.

The U.S. had a $63bn trade deficit with Mexico last year, compared with a surplus of $7.7bn with Canada. The automotive trade deficit with Mexico was $74bn. In other words, if you took out trade in cars and car parts over America’s southern border, the U.S. would actually be running a trade surplus with Mexico.

Most of the world's biggest automakers have set up assembly plants in Mexico, taking advantage of wages that are significantly cheaper than in the U.S. Traditional U.S. automakers still do much of their advanced design work and research and development in the Detroit area. By taking advantage of the comparative advantages of each country, automakers have behaved much as trade textbooks would have predicted when Nafta was born in 1994.

Yet the offshoring of assembly work has contributed to the steady decline in manufacturing jobs in America, a trend to which some Rust Belt communities are still struggling to adapt. During the election, Trump's promise to take a hard line on trade appealed to people who feel they've been left behind by globalization.

Read Full Article

Trump's Nafta Victory Rides on Big Changes to How Cars Are Built