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Trump's NAFTA victory rides on big changes to how cars are built

| Wednesday, June 28, 2017, 11:18 p.m.
Ford, along with other U.S. auto manufacturers, has set up assembly plants in Mexico, taking advantage of wages that are significantly cheaper than in the United States.
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Ford, along with other U.S. auto manufacturers, has set up assembly plants in Mexico, taking advantage of wages that are significantly cheaper than in the United States.

WASHINGTON — To President Trump, America's $500 billion trade deficit is a symbol of economic weakness. If he wants a revamped North American Free Trade Agreement to shrink that number, he'll need a seismic shift in how cars are made on the continent.

With negotiations expected to start in August, makers of everything from toys to microchips are making their case for how the Trump administration should reshape the 23-year-old trade accord with Mexico and Canada. Based on the president's zeal for reducing the deficit, the auto industry could hold the key to U.S. success in the talks. Trump has threatened to walk away from NAFTA if he can't get better terms.

The United States had a $63 billion trade deficit with Mexico last year, compared with a surplus of $7.7 billion with Canada. The automotive trade deficit with Mexico was $74 billion. In other words, if you took out trade in cars and car parts over America's southern border, the United States would actually be running a trade surplus with Mexico. Most of the world's biggest automakers have set up assembly plants in Mexico, taking advantage of wages that are significantly cheaper than in the United States. Traditional U.S. automakers still do much of their advanced design work and research and development in the Detroit area. By taking advantage of the comparative advantages of each country, automakers have behaved much as trade textbooks would have predicted when NAFTA was born in 1994.

Yet the off-shoring of assembly work has contributed to the steady decline in manufacturing jobs in America, a trend to which some Rust Belt communities are still struggling to adapt. During the election, Trump's promise to take a hard line on trade appealed to people who feel they've been left behind by globalization.

The car industry is “really the center of the basic debate about trade that's going on right now,” said Ethan Harris, head of global economics research at Bank of America Merrill Lynch. “From an efficiency point of view, it's been a tremendously successful aspect of the North American Free Trade Agreement. From the perspective of the appearance of fairness, it's a big sore thumb.”

NAFTA helped create an integrated supply chain that sees many auto parts cross the U.S. border at least eight times before a vehicle is assembled, the Alliance of Automobile Manufacturers said in a letter this month to Trump's top trade negotiator, Robert Lighthizer.

“Disrupting this integrated supply chain would increase prices, lower sales, threaten exports and endanger American workers' jobs,” the alliance said, adding that automakers could seek supplies outside North America if the continental business model unravels. The group represents companies that sell cars and trucks in the United States..

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