President Trump has been talking about making “tweaks” to NAFTA and other trade accords. But would such changes help the U.S. auto industry to step on the gas – or set it on a collision course with higher prices, fewer jobs, and frustrated manufacturers?

Just like global trade, the answer is complex. In today’s integrated global supply chain, parts can travel thousands of kilometres and cross back and forth over a number of borders before becoming a completed product – at a price consumers can afford.

And this is especially true with the longstanding relationship between the Canada-U.S. automotive industries.

For the average motor vehicle manufactured in Canada and shipped to the U.S., almost half the parts are made in America. That means that every time an American buys a Canadian motor vehicle, they’re putting money, and jobs, back into the U.S. economy.

Canadian automotive components shipped to the U.S.

And it’s the same for Canadian automotive components shipped to the U.S., which have an average of 28% American content.

U.S. Content in Canadian Exports to the U.S. (%)

U.S. Content in Canadian Exports to the U.S. (%)

 

 

U.S. Trade in Automotive Parts

In fact, compared to other sectors, the automotive sector is one of the most integrated supply chains shared between Canada and the U.S. That’s why many analysts believe that sticking to current agreements would have a positive and beneficial impact on both sides of the border.

U.S. Trade in Automotive Parts* — Major Trading Partners 2016

All values in millions USD

Trading Partner US Exports To (2016) US Imports From (2016)
Australia 692.9 170.0
Brazil 836.5 489.1
Canada 20,977.0 13,775.5
China 2,394.0 13,129.4
France 256.6 680.5
Germany 891.6 7,874.5
India 171.9 1,036.9
Japan 965.2 12,047.9
Mexico 19,812.3 46,038.6
South Korea 725.3 6,456.8
Taiwan 64.5 2,363.4
Thailand 425.6 928.2
United Kingdom 1,159.5 1,324.6
All Other Countries 5,504.4 8,482.7
Total, All Countries 54,877.4 114,798.1

 

* Automotive Parts comprised of following NAICS sub-sectors:

33631: Motor Vehicle Gasoline Engines & Engine Parts

33632: Motor Vehicle Electrical & Electronic Equipment

33633: Motor Vehicle Steering & Suspension Parts

33634: Motor Vehicle Brake Systems

33635: Motor Vehicle Transmission & Power Train Parts

33636: Motor Vehicle Seating & Interior Trim

33637: Motor Vehicle Metal Stampings

33639: Other Motor Vehicle Parts

Source: EDC Economics and US Census Bureau

Fasten your seatbelts for revved-up demand

And of course, it’s never a good idea to start making changes to an economic driver’s engine when it’s going full speed down the freeway, which is likely where demand for motor vehicles is headed.

“While other sectors of the U.S. economy are still lagging seven years after the recession, autos have already zoomed back to their pre-recession level,” says Peter Hall, Vice-president and Chief Economist at Export Development Canada.

To start with, the U.S. market is already demanding 18 million light vehicle sales per year.

On top of that, Americans have tended to put off buying new cars due to the long recession. The average automobile in the U.S. is currently 11 years old, so buyers can’t hold out much longer. This means demand for new cars is expected to remain steady or grow over the next several years at least.

32% of young adults live with thier parents

Then there’s the Millennials, and their impending impact on the economy. Almost a third of U.S. young adults are still living at home, roughly 25 million people. But as the American economy shifts into higher gear, bringing more jobs and higher incomes, they may start moving out of their parents’ basement– and spending money that will boost the economy and further inflate demand for vehicle sales.

Capacity utilization means how much of the productive capacity of a plant, firm, or country is being used to generate goods and services. The U.S. automakers are already putting the pedal to the metal, topping 85% of capacity utilization in December 2016, which is nearly an all-time high. That means that meeting the increased demand will be an uphill battle for them without their Canadian counterparts. Canadian auto sales to the U.S. reached $84 billion in 2016, the highest sales since 2002.

Growth in Canadian Automotive Exports to the U.S. (in $CAN)

Growth in Canadian Automotive Exports to the U.S. (in $CAN)

Automaker Capacity Utilization

Automaker Capacity Utilization

Steering in the right direction with diversified supply chains

The days of one-country, fully-integrated car manufacturers are long gone. To get the best quality at the lowest cost, automotive manufacturers build complex supply chains winding through a wide variety of countries.

Automotive OEMs and suppliers have invested billions on both sides of the border, building out highly specialized and interconnected supply chains. These supply chains are too integrated to be easily torn apart without disrupting the industry sector.

Sign 1

 

Firms have spent years developing finely honed logistics and inventory management that will take years to replace.

Sign 2

 

Solely U.S.-based production would increase costs, making the U.S. autos less competitive and upsetting customers and shareholders, while making competitors ecstatic.

Sign 3

 

In the U.S., some 637,000 direct and indirect jobs are supported through trade in the automotive sector.

Sales may hit the brakes if an import tax is implemented

Moreover, a 20 percent import tax (the amount most commonly discussed) could drive U.S. vehicle prices up and out of range for many American consumers.

Many buyers already are stretched to the limit, as dealers increasingly rely on seven-year and sometimes even eight-year loans to help…

Nick Bunkley

According to Nick Bunkley in Tax threat heightens concern about affordability (Automotive News Canada), “Among the vehicles hit hardest would be entry-level nameplates that automakers rely on as gateways for new customers but say they can’t make profitably in the U.S.”

The same article reports, “Many buyers already are stretched to the limit, as dealers increasingly rely on seven-year and sometimes even eight-year loans to help fit monthly payments into customers’ budgets. Median U.S. household income fell 1 percent between 2005 and 2015, the most recent year for which U.S. Census data is available, while the average transaction price for a new vehicle jumped 21 percent over the same period.”

Driving up prices

A 20% border adjustment tax would see prices increase an average of several thousand dollars.

The average vehicle price increase needed to offset a 20% border-adjustment tax

 

Tesla $0
Ford $282
General Motors $995
Honda $1,312
Fiat Chrylser $1,672
Nissan $2,298
Toyota $2,651
Hyundai/Kia $2,704
Subaru $3,656
BMW $3,725
Mercedes $4,211
Mazda $5,156
Mitsubishi $5,938
Volkswagen $6,779
Geely (Volvo) $7,643
Tata (Jaguar Land Rover) $17,204

Source: Baum & Associates