Opinion: How Trump can really boost U.S. automobile manufacturing

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.

Workers assemble the Forte sedan on the floor of a Kia plant in Nuevo Leon, Mexico, which began production in May. (Natalie Kitroeff/Los Angeles Times/TNS)

Workers assemble the Forte sedan on the floor of a Kia plant in Nuevo Leon, Mexico, which began production in May. (Natalie Kitroeff/Los Angeles Times/TNS)

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.

Reader Comments 0

39 comments
ATLAquarius
ATLAquarius

I think you can count on no free trade agreements for the next four years....I doubt there will be any re-negotiated ones either 

mick2k
mick2k

Trump has already brought back auto maker jobs to America and he has brought jobs into this country that were never here before from Japan now from China's alibaba Jack Mu committing to create 100,000 jobs kin America. Mu has the inside track to sell American products in the Chinese market once closed to America. It's doubtful Trump will have to use any form of tariff with a 15% corporate tax rate, even inversions will disappear.  But if need be we will survive the doom and gloom dispersion cast by anti-Amerca 1st Libertarians. Jack Kemp is dead and so is his failed global ideas. 


Go President Trump 

   

AndyManUSA#45
AndyManUSA#45

Di-ck Turbin, questioning the nominee for Attorney General, the highest law enforcement officer in the land; "Senator Sessions, regarding immigration, you have stated that you will not grant amnesty to illegals but instead, and I quote you, will follow the law."


I'm not kidding.

Caius
Caius

@AndyManUSA#45 The law states that if an alien child approaches the US border that child must be allowed to enter the US.  Will the attorney general designate enforce that law?  He says yes.



AndyManUSA#45
AndyManUSA#45

The first two questions out of the democrat's mouth; abortion and same sex marriage. The most important issues facing our country? Really?


Question #3, asked of a man with 4 Asian American grandchildren sitting behind him; Are you racially insensitive?


The depths to which this party, the party of the liberals, has dragged our country into the cesspool makes me want to cry. Literally. 


We do not need a democrat party anymore.

RoadScholar
RoadScholar

Excellent column Kyle! Combine this with an article describing why the unemployment of 25-50 years old white men is so high; lack of education, lack of marketable skills, criminal records, and painkillers lead the way!

AndyManUSA#45
AndyManUSA#45

"Will you recuse yourself from any future investigations of secretary clinton's email and crime family foundation?"


I like it.


LOCK HER UP!

Hedley_Lammar
Hedley_Lammar

The biggest problem is Trump doesnt understand any of this.


Gonna be a long 4 years.

AndyManUSA#45
AndyManUSA#45

But other Republicans said they would vote for Mr. Holder despite his acknowledged mistakes. Senator Jeff Sessions of Alabama, for example, said he was sure that Mr. Holder would be “a responsible legal officer and not a politician.”


Mr. Holder is expected to be sworn in Tuesday as the nation’s 82d attorney general — the first African-American to hold that position — and will meet with Department employees.


http://www.nytimes.com/2009/02/03/us/politics/03holder.html

AndyManUSA#45
AndyManUSA#45

If Mexico wants good jobs or Europe seeks to re-arm, then they can first make their own necessary adjustments to give them what they need without necessarily involving the U.S., whose first obligation is to make sure that its own citizens are well, secure, and employed. It seems that in Trump’s view, America’s poor and forgotten have claims on this country’s attention that far outweigh those of the illegal immigrant or the globe-trotting internationalist; the lathe worker in Des Moines and the real estate broker in Manhattan, by virtue of being American, deserve more of Washington’s attention than international bureaucrats or foreign royals. The least American is preferable to the greatest foreigner.


Policies are good or bad based on how much they cost and how much value is returned on the sale. Success is profitability; failure is red ink and negative net worth. The solution to the inner city is an economy in overdrive — not government handouts, but so many good jobs that employers are forced to hire at good wages every employee they can find.


We've had twenty some years of free trade policies. We've also had twenty some years of decline of rural and middle class America. The facts are in. Time for change.

 http://www.nationalreview.com/article/443667/trumpism-tradition-populism-american-greatness-strong-military



breckenridge
breckenridge

@AndyManUSA#45 

You don't get it.  But that's certainly not surprising.  And the idea that Trump is a populist? Only a fool would believe such drivel.

breckenridge
breckenridge

Problem is offshoring took off under REAGAN and the tax incentives for offshoring were never addressed!!

If you run a company, then you have an obligation to  your shareholders to keep your labor costs as low as possible.  Anything else would be irresponsible.

But far, far more jobs have been lost to automation than sending them overseas.  And that trend will continue.  America is a post-industrial society, and building cars or widgets or whatever will keep fading into the rear view mirror as the years go by. 

jhgm63
jhgm63

Mr. Trump might be able to convince auto manufacturers to build their cars in the US but I suspect when they do, the plants will have fewer and fewer workers as the plants become more automated. Just as Andrew Puzder wants to replace the line workers in his restaurants with self serve kiosks, I suspect manufacturers will seek to replace their workers with automation and probably for many of the same reasons.

lvg
lvg

Meryl Streep Did her best performance ever at the Golden Globes.

MaryElizabethSings
MaryElizabethSings

Two public announcements:


(1) Be sure to watch President Obama's Farewell Speech to the nation tomorrow from Chicago, 8 p.m. CST and 9 p.m., EST.  

I predict that his speech tomorrow will be about his vision for this nation and our world as much as about the accomplishments of his administration, of which Obamacare was astounding, especially with all the Republicans in the U. S. Congress trying to make his signature legislation for the American people fail, from day one.


(2) "Lawmakers," PBS-TV, Channel 8, Atlanta, tonight from 7 to 7:30 p.m. regarding what is happening in this session of Georgia's Legislature.  This program will continue on the same channel each day at 7 p.m. while Georgia's Legislature is in session for 2017.

Astropig
Astropig

Decades of stagnant or falling wages,pensions eliminated,and ever higher costs and co-pays for medical insurance and that's still  not enough to keep jobs from leaving? 

Caius
Caius

There are 7 billion consumers on planet earth and 310 million of them live in the US.


AndyManUSA#45
AndyManUSA#45

 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.


So the ta-riff should be 17.2% instead of 35%, in this ins-tance.


Let them deal with it. They made the choice to stiff the American worker and use cheap Chin-ese dry-wall, er I mean, cheap Mexic-an auto parts based on cost and now they have two choices. Have their savings neu-traliz-ed by paying the tar-iff or return to the United States and lob-by their government to all-ow an ex-ception to an existing trade deal or renego-tiate new ones on better terms. Work within your own borders to lower the costs as much as you can. Ship-ping already offs-ets labor so ev-erything else should be a ma-tter of diplo-macy. 

Kyle_Wingfield
Kyle_Wingfield moderator

@AndyManUSA#45 "So the ta-riff should be 17.2% instead of 35%, in this ins-tance."

You don't get to charge a tariff on cars sold between other countries. That's the point.

SGTGrit
SGTGrit

With the pendulum swung too far away from America's best interest in this so called global economy it must be brought back and the playing field leveled. All both parties have done was to export too much of our middle class maybe Trump, can address this disparity. We shall see.

HDB0329
HDB0329

@SGTGrit ....problem is offshoring took off under REAGAN and the tax incentives for offshoring were never addressed!!

Caius
Caius

@SGTGrit How do you level the playing field? How about a law that only autos produced in the US can be sold in the US? Think that would work?

SGTGrit
SGTGrit

@Caius @SGTGrit  No...the world depends on the U.S. consumer market we have the influence we need to use it. We'll see if Trump can make a difference.

SGTGrit
SGTGrit

@JFMcNamara @SGTGrit @Caius  Good point but we're able to sustain a trade war far better than other nations. I don't think give and take negotiations would result in serious trade war scenarios. Our problem is the national debt and the stupids in both parties who overspend to the extent trade deficits are the cost for foreign nations to keep buying our debt. It's unsustainable and will, in all probability result at some point in a world war. Sorry, hate to say it and you'll probably hate me for saying it.

JFMcNamara
JFMcNamara

@SGTGrit @JFMcNamara @Caius The national debt isn't a problem.  The U.S. isn't near default.  It will just affect the exchange rate. 


You dont understand trade deficits.  Google Milton Friedman and watch one of his talks about it.  


We would fare worse in a trade war because of price inflation.  We import a lot of goods, so a reciprocal tariff would raise prices here on just about everything.  25% more for groceries, cars, clothes, everything.  The poor and middle class would get killed.

SGTGrit
SGTGrit

@JFMcNamara @SGTGrit @Caius  Evidently, you don't understand economics and the problem of foreign countries like China financing our national debt.

JFMcNamara
JFMcNamara

@SGTGrit @JFMcNamara @Caius I have already explained it, but here it is in simpler terms.


China is an exporter nation.In order to sell their good to the U.S.  they need their currency to be weak in comparison to the dollar.  To do that, they hold a massive amount of U.S. debt.


China cant recall the debt they own, because that would crash the dollar.  If the dollar crashes, then export prices would rise and U.S. citizens would face higher prices and buy American.  That would crash the Chinese economy.


China is extremely poor, so they would never, ever do that.


What am I missing?

HDB0329
HDB0329

....if Trump were really interested in bringing manufacturing back to the US, he'd find a way to link education to the manufacturing sector. Tim Cook said this when asked why he doesn't do more manufacturing in the US: "I can place the tool and die manufacturers in the US in a hotel ballroom; I can place the tool and die manufacturers in China on a football field!"


5-to-1...Orange Julius doesn't see this.......


Kyle -- you are on point......

Caius
Caius

Nice column Kyle.  Important column as is the Bloomberg piece.

But we are being asked to blame ourselves rather than the Mexicans. That is not going to go over to well with many.


Note: what is the cost per vehicle of healthcare for production workers in Mexico and the US?


bu22
bu22

@Caius Well the tool and die manufacturers have to import their steel from China, adding to their costs.  The US allowed China to sell steel below production cost which drove US Steel producers out of business.

JFMcNamara
JFMcNamara

Milton Freidman would be proud.  Nicely written, but probably over the heads of the people that it needs to reach.

Tiberius Constitutionus
Tiberius Constitutionus

Trade agreements will probably remain much as they are now. Trump will be too busy tweeting insults to his enemies.

Pablo1885
Pablo1885

Overall a thought-provoking article, but I can't agree with this assertion: "That’s why the cars you see built in Mexico and shipped to the U.S. are models that are overwhelmingly exported elsewhere, with a relatively small number shipped back here"


In fact, more than 70% of Mexican auto exports go to the US.

Kyle_Wingfield
Kyle_Wingfield moderator

@Pablo1885 Aargh, I left out "increasingly." This is increasingly true, as new plants for new model lines are built in Mexico.

McGarnagle
McGarnagle

All the stats and facts in the world will not convince Trump. He is adamant to bring a few labor jobs to the US in return for the overall health of our economy. 


The article is part of the intellectuals and elitist who know nothing. Their words fall on deaf ears.

ESalden
ESalden

David Welch and Dave Merrill (and Kyle) are right, but the truth will be difficult for Trump’s supporters to swallow.

MarkVV
MarkVV

The best Kyle's column I have seen in a long time.