The Mexican automotive sector hit a high water mark this March in terms of production, exportation, and domestic sales.
The Mexican Automotive Industry Association, la Asociación Mexicana de la Industria Automotriz (AMIA), reported that production, exports, and domestic sales were up 36.2%, 32.7%, and 17.2%, respectively, in March 2017 as compared to March 2016.
The March data show that the United States continued to be the primary destination for vehicle exports, followed by Canada.
As the Wall Street Journal reported, this uptick was due to new production facilities and, since Easter falls in April this year, more work days in March.
Mexico’s automobile trade with the United States and Canada provides an excellent example of the benefits of NAFTA to all three member countries. Laura Tyson, former chair of the President’s Council of Economic Advisers, explains in an article for Project Syndicate:
Perhaps more important, the US and Mexico aren’t just exchanging finished goods. Rather, much of their bilateral trade occurs within supply chains, with companies in each country adding value at different points in the production process. The US and Mexico are not just trading goods with each other; they are producing goods with each other.
However, the good news is being overshadowed by President Trump’s statements about the North American Free Trade Agreement. Beginning with the presidential campaign and continuing into his administration, President Trump has taken a hard stance on trade, especially trade with Mexico. This stance includes threatening American companies that invest in Mexico.
This animus towards trade in general and NAFTA in particular has led to two proposals that could have drastic consequences for the United States’ trade with Mexico and the Mexican automotive sector: a border adjustment tax and a renegotiation of NAFTA.
Border Adjustment Tax
As a way to promote domestic manufacturing without technically raising tariffs, some conservatives in the United States have called for a 20% border adjustment tax on all imported goods sold domestically.
Since the tax became a serious policy proposal, critics and proponents have been making their cases. Investopedia provides a summary of the two sides’ arguments:
Critics of the tax argue that prices will rise on imported goods, for example from China, and that the result will be inflation. The tax’s creators respond that the surge in foreign demand for U.S. exports will strengthen the value of the dollar; in turn, a strong dollar would increase the demand for imported good, so that the net effect on trade is neutral.
Critics, including many Republicans in the Senate, also argue that such a tax would too harshly penalize US businesses that rely on imported goods.
While President Trump and Speaker of the House of Representatives Paul Ryan support a border adjustment tax, Republicans in the Senate say that such a measure would not pass that chamber.
In a recent twist, the Trump administration appears to have changed course on NAFTA.
In a letter to the Senate and House, the acting US Trade Representative conveyed the President’s intent to renegotiate NAFTA. The document lays out how far President Trump has moved on this issue from his campaign statements when the question was whether Trump would withdraw completely from NAFTA.
As a recent Vox article points out, many of the aspects of NAFTA to be renegotiated are updates, including labor regulations, environmental protections, and rules of origin, to bring the to the 23-year-old treaty into the 21st century:
For instance, there’s discussion of the need to update NAFTA in order to develop rules regarding e-commerce, digital sales, and data housing requirements — basically ensuring that there are new regulations specific to the information economy, which has blossomed since the accord was first negotiated decades ago.
In a more controversial move, it appears that the Trump administration may also look to restructure the current dispute settlement procedures. Again, from the Vox article,
The US calls for the removal of one of three major dispute settlement processes under NAFTA, known as Chapter 19, which allows for the creation of international tribunals to help sort out disagreements over measures designed to penalize trade cheating. But it doesn’t call for the elimination of the most controversial one — the investor-state dispute settlement system that allows investors to sue governments in private trade tribunals and basically gives corporations the status of countries under international law.
Such tribunals have been contentious since the early years of NAFTA. A recent decision of the investor-state dispute system in Eli Lily v. Canada, the court dismissed a $500 million suit brought by the US pharmaceutical company Eli Lily against Canada.
The North American Free Trade Agreement has been a boon for intra-North American trade and consumers in Canada, Mexico, and the United States.
While the early years of NAFTA were marked by discontent with the free trade agreement, gains are being strongly felt in all three countries as economic integration has strengthened. In Mexico, the recent boom in the automotive sector has brought good paying jobs and Mexican made cars to a growing middle class.
As the Trump administration and Republican-controlled Congress move forward on reforming trade and tax policy, they would do well to remember the gains to all countries from free trade.
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