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NAFTA revamp threatens success of U.S. auto sector

Employees work on a Fiat 500 at a Chrysler plant in Toluca, Mexico. Mexico now represents about one-third of auto parts exported from the United States.

Susana Gonzalez/Bloomberg

The administration of Donald Trump should have a keen interest in maintaining NAFTA as it is when it comes to the auto industry, the Bank of Nova Scotia says in a report on the sector.

U.S. auto-industry shipments to Mexico have grown since the North American free-trade agreement came into force in 1994 and employment growth in the sector has outpaced job gains in both manufacturing and the U.S. economy as a whole during the current expansion, the bank says in its monthly Global Auto Report.

The data underline the strategy Canadian auto executives and the federal and Ontario governments have adopted in the run up to negotiations on rewriting the U.S.-Canada-Mexico agreement, which is to convince Americans that their interests will be harmed if the automotive terms of the deal are substantially altered.

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The trade deal has effectively become the operating system for the auto industry with vehicles and parts manufactured in all three countries and shipped duty-free between them.

"Any new restriction of the free flow of vehicles and parts among the three countries would have a negative impact on economic activity in all three jurisdictions," the bank said. "This integration has boosted productivity and enhanced the industry's competitiveness, enabling it to increase its share of global exports."

Any disruption to the supply chain could lead to job losses for some of the two million people employed at vehicle assembly and parts plants in the three countries, the study said.

Mexico now represents about one-third of auto parts exported from the United States, compared with less than 5 per cent when NAFTA first took effect.

Shipments by the U.S. auto industry to Mexico have increased by 7 per cent annually since 1994, which is about double the rate of growth in exports to the rest of the world.

"The U.S. auto industry is the major supplier of auto parts to both its NAFTA partners and has been a major beneficiary or the rapid expansion of assembly plants in Mexico," the study said.

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Mr. Trump has promised to tear up NAFTA, identifying it as the cause of thousands of lost jobs in the auto and manufacturing sectors.

Auto makers have invested billions of dollars and created tens of thousands of jobs in Mexico in recent years, but most of that investment is in new assembly plants, not factories that were shifted out of the United States.

Among the arguments being made by Canadian industry officials is that North America needs a site where labour-intensive work such as making wire harnesses and cutting and sewing seat covers can be done cheaply. Asia has countries where such work can be done inexpensively, as does Europe, so if Mexico is no longer available as a site for such activity, North America will become uncompetitive, the officials argue.

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About the Author
Auto and Steel Industry Reporter

Greg Keenan has covered the automotive and steel industries for The Globe and Mail since 1995. He also writes about broader manufacturing trends. He is a graduate of the University of Toronto and of the University of Western Ontario School of Journalism. More

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