The Future for US Automakers and NAFTA

As many of us know, the North American Free Trade Agreement (NAFTA) played a significant role in the US elections, with president-elect Donald Trump clearly stating that he will renegotiate the agreement with Canada and Mexico in order to stop the outflow of middle-class jobs. Changes in NAFTA would transform the auto industry in the US since it allows automakers, as well as other suppliers, to move production to Mexico without facing any tariffs and take advantage of the lower labor costs.

After Mr. Trump criticized General Motors this week on Twitter for importing compact cars from Mexico, Ford announced that it has canceled its plan to build a $1.6 billion small-car factory in Mexico, and will be creating about 700 jobs in Michigan instead. Other major US manufacturers have also begun to update their contingency plans in order to stay safe from Mr. Trump’s policy changes and future increases in tariffs.

Also, middle-class jobs, commonly referred to as routine jobs, have been disappearing due to the transformation from an industrial economy to a digital one where routine work is outsourced or automated and the remaining jobs are concentrated in low-paid service work or high-skilled knowledge work. These groups of people have moved into lower paying jobs and some have of stopped working at all. Therefore, in addition to NAFTA, technological advances in manufacturing are also eating away these jobs.

Interestingly, The Peterson Institute for International Economics estimates that while imports from Mexico have displaced 203,000 U.S. jobs annually in recent years, the two-way trade has also created 188,000 U.S. jobs due to exports headed south. In any economy, any sort of change in policies creates some side effects. Therefore, any decision taken by Mr. Trump to retain jobs and prevent offshoring would inevitably hurt other parts of the US economy.