Changes to border tax, NAFTA, will harm automakers, suppliers, study says

Two proposed policy changes—imposing a border adjustment tax (BAT) and withdrawing from the North American Free Trade Agreement (NAFTA)—would likely fail to achieve their goal of reversing the trend of offshoring manufacturing to low-cost countries and could potentially harm the U.S. motor vehicle industry, according to a new study by The Boston Consulting Group (BCG).

The study, commissioned by the Motor & Equipment Manufacturers Association (MEMA) and conducted independently by BCG this spring, examined the real-world implications of a border tax and changes to NAFTA on the motor vehicle sector—how they would impact new-vehicle and supplier costs, new-car features and prices, consumer purchases, jobs, and trade. It also looked at how global macro trends in the industry are affecting the goal of encouraging reshoring and what alternative policy actions could be taken to spur growth in U.S. automotive manufacturing. It found that car prices, vehicle sales, supply chain decisions, and industry employment all could be negatively affected by the proposals.

As currently envisioned, the BAT is a byproduct of corporate tax reform. In concert with lowering corporate tax rates to 15 to 20 percent, the BAT would impose at least a 15 percent tax on imports while exempting the value of a company’s exports from business taxes. BAT supporters in Congress hope that the added import fee will encourage manufacturing in the U.S. while contributing funds to help cover the overall corporate tax cut.

Analyzing the implications of a 15 percent BAT on the motor vehicle industry, the study found that U.S. automakers and suppliers would pay $34 billion in import taxes annually while realizing only $12 billion in export benefits. This translates into an average $1,000 increase in per-vehicle manufacturing costs at the top 12 automakers selling cars in the U.S.; a 20 percent BAT would add an average of $1,800 to per-vehicle production costs.

The cost implications for individual automakers would differ based on the types of vehicles they manufacture, whether their factories are in the U.S. or elsewhere, and the price range and models in their brand portfolios. But among automakers studied by BCG, the impact would range from a savings of $500 per vehicle to an increase of $3,000 per vehicle production cost if the 15 percent BAT were instituted. To save costs, consumers would likely forgo certain vehicle features, which would diminish vehicle industry employment in the U.S. The study estimates that 3 to 5 percent of the jobs in U.S. supplier factories—20,000 to 45,000 positions—could be affected.

The threat by the U.S. to walk away from the NAFTA trade pact carries at least the same potential implications for the motor vehicle industry because of the outsize trade among U.S., Mexican, and Canadian automotive companies. In place of NAFTA, some policymakers have called for tariffs on autos and auto parts coming into the U.S. from Canada and Mexico, ostensibly as a way to protect U.S. motor vehicle industry jobs and to encourage vehicle manufacturers to build or expand plants in the US.

The study found that U.S. tariffs of 20 to 35 percent would add $16 billion to $27 billion to automotive costs in the U.S. market. At the top 12 passenger vehicle manufacturers in the US, a 20 percent tariff on Mexican imports would translate into a $650 average increase in per-vehicle production costs. As a result, car buyers could reduce as much as 6 percent in supplier content—and 25,000 to 50,000 positions in U.S. supplier factories.

An important change in NAFTA rules would weaken the ability of U.S. motor vehicle companies to compete globally, says BCG. About half of all imported parts that U.S. OEMs procure for vehicle production come from low-cost countries, and nearly 50 percent of these components are from Mexico. An increase in NAFTA’s tariffs or rules of origin could drive up costs per vehicle substantially. And it would place the U.S. motor vehicle companies at a disadvantage against, for instance, German automakers, which import about the same percentage of components from low-cost countries as their U.S. counterparts do now.

For a summary of the analysis and findings, visit http://bit.ly/2tbMVHh.