Article based on an exclusive interview with Juan Francisco Torres Landa, Partner at Hogan Lovells.
A: There will definitely be changes but not as dramatic as people are assuming. Once the right information reaches Capitol Hill, the US Ministry of Commerce, the US Treasury and the US Ministry of Labor, the country will realize that many of President Trump’s arguments from his campaign are invalid when compared to hard facts. The automotive value chain in the NAFTA region has developed over the past 22 years and the loss of jobs in the US is not connected that significantly to the development of Mexican industrial sites. Many of the jobs that President Trump is trying to recover were lost due to technological reasons, namely automation, while others were eliminated because of cost effectiveness strategies. It is not that a job in Mexico replaces a job in the US, but the wage difference between both countries is enough for companies to reconsider their location to remain viable in a highly competitive industry.
Profit margins in the automotive sector are extremely narrow and that forced it to become a global industry. The only way companies can remain successful is being cost effective and competitive. Therefore, I do not see the Mexican automotive industry disappearing after just a few threats.
Q: How has NAFTA benefitted the North American region and how would terminating the agreement affect it?
A: If President Trump’s ideals were to materialize, the first to suffer would be US companies. Pulling out of NAFTA for example, would be detrimental to the US’ economy. If we consider its ratio in size compared to Mexico 22 years ago, the results show that the ratio favors the US. Our country used to represent 21 percent of the US economy in 1994 and that number has lowered to 17 percent. Mexico has expanded its trade in the NAFTA region considerably and our trade with the US has tripled, yet our economic dominance has shrunk 4 percent compared to the US.
The only explanation for the difference in size, economy-wise, is the benefits that NAFTA has brought to the US, which means that the country has much more to lose than it has to gain from terminating the free-trade agreement. Between 6 and 10 million jobs in the US depend directly on NAFTA and if President Trump’s goal is to create more jobs, he will have to think very quickly about how to create more than 10 million jobs to offset NAFTA termination effects in the US.
Q: How probable is it that President Trump could successfully implement the promised 35-percent tariffs on Mexican imports?
A: President Trump is legally able to assess a 35-percent tax on imports as he has promised. Section 301 of the 1974 US Trade Act authorizes the President to impose duties on countries he thinks are being unfair to the US, or as a required measure to protect domestic industry. Unlike anti-dumping investigations, which have to be overlooked by the WTO, section 301 of the 1974 Trade Act allows the President to implement direct measures in the best interests of the US. However, the other country (in this case Mexico) can impose retaliation measures equal to the value of the duties being imposed by the US. This means that Mexico will have natural partners inside the US that will fight a 35-percent tax, namely the US producers of the items being levied with extra duties in Mexico.
This situation has a relatively recent precedent – when the US was blocking the entrance of Mexican trucks to the country in clear violation of NAFTA, Mexico imposed retaliation measures of 15 to 20 percent duties on approximately 30 different products being imported from the US. Immediately, the companies that had to pay this new tax pleaded with the US government to let Mexican trucks cross the border. These end result was that it was mutually beneficial to eliminate trade barriers and return to the best practices and free trade to be productive and efficient.
This is an exclusive preview of the 2017 edition of Mexico Automotive Review. If you want to get other relevant insights regarding the Mexican automotive industry, get your copy of Mexico Automotive Review 2016.