A lot of us on the right were unable to support Donald Trump in the election because some of his proposed solutions to our problems ran in exactly the wrong direction. Nowhere is that more clear than on the question of trade, where his protectionist instincts yield the kind of ideas — tariffs, even trade wars — that would only exacerbate the economic problems Americans face.
For a detailed illustration of why this is true, you could hardly do better than this piece by Bloomberg’s David Welch and Dave Merrill. It outlines the reasons why, to the extent we’re losing manufacturing jobs to trade rather than technology, that’s because we have too little free trade, not too much.
First, despite the recent, high-profile announcements for which Trump has (dubiously) claimed credit, the story makes clear the trend of U.S. automakers moving jobs to Mexico is not going to end. More to the point, foreign automakers, especially European ones, are also putting factories in Mexico that in past decades would have gone north of the border. What’s important is to understand why.
Here’s the central point:
“Cheaper labor is only one reason Mexico has seen a surge in new-car production. While the country’s low wages have been the big attraction, one of its key advantages is that it has trade agreements with 44 countries, giving automakers access to half the global car market tariff-free. The U.S. has similar trade deals with just 20 countries, which make up 9 percent of global car sales, according to the Center for Automotive Research in Ann Arbor, Michigan.
“A GM spokesman said most of the Mexican-built Chevy Cruze hatchbacks Trump targeted on Tuesday are exported overseas. Many of the new plants opening in Mexico are producing small SUVs and compact cars such as the Cruze that are more popular with buyers in South America and Europe. That means, that for Trump to get jobs flowing back into the U.S., he might be better served seeking the kind of open market that Mexico has created.”
But what’s fascinating are the per-vehicle numbers. Labor costs are indeed significantly cheaper in Mexico: About $600 per vehicle on “a $25,000 midsize sedan built and shipped in Mexico (compared) with one in the U.S.,” according to the story. Although labor costs for automakers are 80 percent less in Mexico than in the U.S., the savings represents only about 2.4 percent of the price of the car — another indication that, in the era of increasing automation, labor costs aren’t necessarily what drive decisions.
That’s particularly true when shipping costs are taken into consideration:
“Infrastructure in Mexico lags behind the highway and rail network in the U.S., so it actually costs automakers $300 more per car in additional shipping expenses to produce the vehicle in Mexico and ship it to Europe, and an extra $900 to ship it to the U.S.”
Get that? It actually costs an automaker more to build a car in Mexico and ship it to the U.S. for sale, even after labor costs are taken into account. So where’s the savings? Here:
“Automakers can save $1,500 per car on cheaper Mexican auto parts. Certainly, a lot of those savings are tied to the lower wages workers in Mexico are paid. But some of these parts are imported to Mexico tariff-free from countries in Europe and Asia, particularly for the foreign automakers who are increasingly investing in Mexico instead of the U.S. Since the U.S. doesn’t have as many free trade agreements, some of the automakers would pay extra for some of those parts if they made those models in the U.S., said Bernard Swiecki, senior analyst at CAR.
“The same company selling that mid-sized car saves $2,500 per vehicle that it builds in Mexico and ships to Europe because the U.S. doesn’t have a trade agreement with the EU. That’s more than it saves in parts and wages once shipping costs are figured in.”
So, after all those costs are taken into account, an automaker saves about $4,300 on a $25,000 car by making it in Mexico and shipping it to Europe or Asia. And virtually all of that margin represents savings from trade agreements. That’s why the cars you see built in Mexico and shipped to the U.S. increasingly are models that are overwhelmingly exported elsewhere, with a relatively small number shipped back here. Trump won’t bring those jobs back to the U.S. with tariffs.
Read the whole thing for more detail on a per-country basis, but the takeaway here is crystal clear: If Trump wants to make it more attractive to build cars in the U.S., he won’t do it by clamping down on trade. He’ll do it by opening up trade.