The end of NAFTA? For car buyers, that means higher prices

Trade representatives walked away from the fourth round of NAFTA negotiations Tuesday, farther away from an agreement but hopeful that an extension of talks will produce progress toward a revised deal. According to a joint statement between the trade ministers of the U.S., Canada and Mexico, negotiations will now stretch to the end of March 2018, and ministers are planning for more time between rounds so that they can “properly assess all proposals.”

The impasse comes after U.S. negotiators called for new and stricter rules defining the amount of regional content required for vehicles to cross the border duty-free, and a recalibration of how tariffs are calculated on parts from outside the region.

Here’s what it means: according to the American Automotive Policy Council, a typical vehicle sold by, say, General Motors or Chrysler has an average of 30 percent U.S. parts content – everything from seats to lights and brakes. That same vehicle is also required to be made of 62.5 percent of North American parts content; stuff from Canada and Mexico. If the car meets that requirement, it’s duty-free. The Trump Administration now wants that percentage to jump to 85 percent, with 50 percent of the parts content coming exclusively from U.S. sources.

Auto industry experts – not to mention Canada and Mexico trade ministers – say the demand is impossible to accept, and may be impossible to accomplish. For example, some parts are a blend of content that comes from global suppliers, such as electronic components from Japan. That leaves automakers with a choice: jump into the morass of reconfiguring their manufacturing setup and shifting production, or accept the cost of tariffs and shift production overseas – a choice that many believe would be less expensive and more productive.

These demands have, as a result, created what experts fear is an untenable negotiating position, dooming the agreement and resulting in U.S. withdrawal from NAFTA, and the end of the 23-year old agreement.

That’s a bad deal for Americans. Especially the millions of us who purchase cars each year, and who work in the industry. Here’s why:

Small car prices will probably tick up a bit, but truck and SUV prices will skyrocket: The withdrawal of NAFTA reverts the issue of tariffs and regional content back to the World Trade Organization, which would promptly assign a 2.5 percent duty on cars and a 25 percent duty on pickup trucks and SUVs – among one of the most popular vehicle segments in the U.S.

According the Center for Automotive Research (CAR), “If the U.S. were to enact a 35 percent tariff on light vehicles imported from Mexico, CAR estimates the sales impact would be 450,000 units lost in the United States. That 35 percent tariff is what the Trump Administration would apply to vehicles not meeting their content and manufacturing requirements.”

CAR reckons that the Trump-stipulated 35-percent tariff on cars would cost 31,000 U.S. automotive jobs, and a Boston Consulting Group study found that the U.S. auto parts market could lose 50,000 jobs. Without the 35-percent tariff but with a withdrawal from NAFTA, the auto industry would see the loss of 6,700 North American manufacturing jobs, and more likely in the U.S.

According to IHS|Markit, 1.8 million vehicles produced in Mexico during 2016 were exported to the U.S. market. Moving that amount of manufacturing requires capacity that many experts say simply doesn’t exist in the States, and the alternative for automakers would be to look to spread that capacity to other countries. They would then pay the Trump-stipulated 35-percent tariff, which would add between $5,000 – $15,000 to the sticker price on new cars – and result in the cratering of the automotive business.

Just imagine: a base model Chevy Silverado would go from about $28,000 to a $40,000 sticker price.

Ultimately, when it comes to the automotive industry, the issue of NAFTA and U.S. involvement in the agreement shouldn’t be based on political campaign rhetoric. The complicated science behind the manufacture and sale of vehicles ought to instead be predicated on driving the industry forward to better and more affordable practices that leverage regional strengths and promote regional partnerships.