Why Automotive Manufacturers Are Moving to Mexico
We hear the complaints on the national political stage all the time and accusations as to why manufacturers are moving to Mexico. Donald Trump has repeatedly criticized Ford for moving some operations south of the border, and some have placed the blame on the North American Free Trade Agreement (NAFTA). But there is a less flattering reason Mexico is getting these automotive assignments: Mexico simply has more free trade than the US.
Free Trade is Why Manufacturers are Moving to Mexico
While the US is no slouch and boasts over a dozen free trade agreements (FTAs) with countries all over the world – most notable of which is the NAFTA – Mexico has far more. The Latin American country has made great strides in recent years and decades to transform the developing economy into a manufacturing powerhouse for export to virtually every major market in the world. With over 40 FTAs in place, Mexico has recently attracted nearly $20 billion USD in new investment.
Nowhere is this more obvious than in the automotive industry. Carmakers from Europe, Japan, and the US all partner with shelter companies in Mexico to manufacture for export back to these major markets. Since NAFTA was enacted, the country’s automotive exports have tripled, and Mexico is now the 8th largest vehicle producer in the world. 80% of those vehicles are exported globally.
While some are quick to condemn the NAFTA for sending US jobs to Mexico, the reality is that US automakers like Ford and GM are not Mexico’s primary partners. Mexico’s FTAs have built quite an export market for America’s southern neighbor. The biggest carmaker in Mexico is Nissan, and the newest plants belong to Audi and Kia. Other plants in the pipeline include BMW and Toyota. And the reason is clear: Mexico already has FTAs with these countries and is the only country in the world who can export to the large consumer market in the US duty free.
That’s what gets lost in the narrative…Free trade agreements are driving BMW and Audi, but they’re not free trade agreements with us. Blame NAFTA all you want — it wasn’t the trade agreement that made that happen. -Bernard Swiecki, director of the automotive communities partnership at the Center for Automotive Research.
The truth of the matter is that Mexico and the US are regional partners more than competitors. The simple reason why automotive jobs are moving to Mexico is Mexico has an open-door arrangement with European and Asian automakers seeking to sell to the US. Meanwhile, 40% of the inputs used in the production of those foreign automobiles are purchased from US companies. In other words, Mexico attracts foreign automakers through low labor costs, low energy costs, free trade agreements, and other incentives, and then uses US-made parts to build these vehicles. In this way, Mexico is bringing in more manufacturing business for not only herself, but also for her partner, the US.
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