COMMENTS BY THE GOVERNMENT OF MEXICO TO THE U.S. DEPARTMENT OF COMMERCE
Section 232 National Security Investigation of Imports of Automobiles, Including Cars, SUVs, Vans and Light Trucks, and Automotive Parts Docket ID: DOC-2018-0002
June 29, 2018
Submitted by: Guillermo Malpica Soto Minister, Trade and NAFTA Office Embassy of Mexico Washington, D.C.
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Pursuant to the Notice of Request for Public Comments and Public Hearing on Section 232 National Security Investigation of Imports of Automobiles, Including Cars, SUVs, Vans and Light Trucks, and Automotive Parts, 83 Fed. Reg. 24735 (May 30, 2018), the Government of Mexico, represented by the Ministry of the Economy, presents the following comments to underscore that trade between Mexico and the United States in automobile and automotive parts does not represent a national security threat to the United States. Mexico is a long-standing ally and economic partner of the United States. The productive association between our nations in the industrial sector under investigation provides a substantial benefit to the United States, and produces a strong and globally competitive alliance that ensures the long-term viability of our industries in the global marketplace. Indeed, in 2001, the Department of Commerce in its report conducted under section 232 on imports of Iron Ore and Semifinished Steel stated that “Mexico – with which the United States shares a 1,550-mile border – is a close ally and is a party to NAFTA”.1 Executive Summary The import of vehicles and auto parts from Mexico that results from the integrated North American market (comprising the United States, Mexico and Canada) does not threaten or undermine U.S. national security. In fact, economic integration in the North America auto sector enables the United States and the region, as trusted allies, to compete and succeed in global markets. Thus, subjecting vehicles and auto parts from Mexico to Section 232 tariffs would run counter to U.S. national security interests and is inconsistent with the intent of Section 232 of the Trade Expansion Act. This document addresses the competitiveness of the U.S. automobile industry and the contribution and complementary role that trade with Mexico plays in the industry’s growth and success. Since 1990, U.S. automobile production, the per-unit value of vehicles and the industry’s overall contribution to U.S. gross domestic product (GDP) have increased. U.S. automakers have recovered from the 2009 economic recession, and have subsequently posted solid gains in employment, production, innovation and corporate earnings. In addition, North American supply chains and trade integration with Mexico strengthen America’s manufacturing base. It enables U.S. automakers to specialize and be competitive with Asian and European automakers. The arbitrary imposition of tariffs under the guise of national security concerns would disrupt these supply chains and make it more difficult for U.S. automakers to compete both domestically and in foreign markets. Making American automakers less competitive undermines the U.S. manufacturing base, harms consumers, and is inconsistent with U.S. national security interests. Applying Section 232 tariffs to automobiles in an effort to gain leverage in other trade talks, such as ongoing North American Free Trade Agreement negotiations, would be a gross misapplication of Section 232 of the Trade Expansion Act. Mexico will remain vigilant for any unjustified trade restriction and will exercise its rights to ensure that the Mexican automotive industry is not adversely affected by the final results of this investigation. This could ultimately harm the U.S. automotive industry and further undercut the global economic relationships that are vital to America’s national security. 1
See https://www.bis.doc.gov/index.php/forms-documents/section-232-investigations/81-iron-oreandsemi-finished-steel-2001/file, pages 27-28.
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The United States automobile sector is highly competitive and thriving Since 1990, U.S. automobile production and the value of production units have increased over 16% and 177%, respectively. In addition, the sector’s contribution to domestic GDP has increased from 6.4% in 1990 to 7.8% in 2017. In fact, over the last decade the sector has experienced a dramatic transformation in terms of quality and value. Since 2009, automobile production in the United States has increased 96.5%, from 5.7 million units to 11.2 million, and sales of luxury cars and SUVs continue to rise despite increased prices.2 Additionally, Detroit’s “Big Three” continue to deliver strong results: GM’s stock price reached $46.76 in late 2017, the highest in its history, and continues to trade above $44; Chrysler’s stock has increased 370% in less than two years, and Ford continues to beat market expectations.3
Light vehicle production Value (in $ millions)
Units (in thousands) 14,000
550
12,000
450
10,000
350
8,000
250
6,000
150
4,000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
650
Source: OICA, BEA
Moreover, the industry’s employment has fully recovered from the 2008-09 economic crisis to represent 8% of overall U.S. manufacturing employment (versus 6.5% in the early 1990’s). In fact, the industry’s employment has increased 6% annually since 2008, five times the overall growth in manufacturing employment,4 and continues to be an important driver of the historically low unemployment rate currently registered in the United States.5
2
Wall Street Journal Market Data Center, Auto Sales, April 2018, http://www.wsj.com/mdc/public/page/2_3022-autosales.html; Mexico’s Secretaría de Economía; Boudette, As auto prices rise, used cars are looking shinier, New York Times, March 2017, https://www.nytimes.com/2017/03/30/automobiles/wheels/consumers-used-cars.html. 3 Bloomberg, Thomson Reuters. 4 Scotiabank, NAFTA: Data at Odds with proposed Changes to Auto Rules of Origin, December 2017. 5 U.S. Bureau of Labor Statistics, https://data.bls.gov/timeseries/CES3133600101?amp%253bdata_ tool=XGtable&output_view=data&include_graphs=true.
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Employment in the United States (millions of workers) Manufacturing (Right Axis)
Automobile (Right Axis) 20 18 16 14 12 10 8 6 4 2 0
141 121 101 81 61 41 21 2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1
Source: U.S. Bureau of Labor Statistics
During the same period, the automotive industry has also experienced a dramatic transformation due to technological advancements and automation. U.S. automotive industry investment in R&D increased 11% between 2007 and 2015, while the “Big Three� announced $35 billion of domestic investments over the last five years and applied for more than 15,000 domestic patents.6 These advances and investments have resulted in increased productivity, and a shift towards higher-skilled employment. Employment and Producitivity in the U.S. Auto Sector Employees (in thousands)
1,400
Productivity (right axis)
130 120 110
1,200
100 90
1,000
80 70
800
60
50
600 2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
40
Source: U.S. Bureau of Economic Analysis
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Strategy&, 2015 Global Innovation 1000: Automotive industry findings, 2016, https://www.strategyand.pwc.com/media/file/Innnovation-1000-2015-Auto-industry-findings-infographic.pdf; American Automotive Policy Council, State of the U.S. Automotive Industry 2017, October 2017, http://www.americanautocouncil.org/sites/aapc2016/files/2017%20Economic%20Contribution%20Report.pdf; American Automotive Policy Council, 2016 Research & Development Report on U.S. Auto Industry, June 2016, http://www.americanautocouncil.org/sites/aapc2016/files/AAPC%202016%20Research%20and%20Development%20Report%20 Press%20Release%20%28FINAL%29.pdf.
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Thousands
Total 161
Productivity in the United States (index, base 2007=100) Total
120
Manufacturing
Automobile
110 100 90
80 70 60 50 2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
40
Source: U.S. Bureau of Economic Analysis
While automobile imports have increased in the last three decades, their share in total U.S. retail sales of light vehicles has remained relatively constant (22.6% in 2017 vs 21.7% in 1990). Imports have not undermined the expansion of domestic production, in particular since the 2009 recession.
Source: U.S. Bureau of Economic Analysis.
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Trade integration with Mexico is beneficial to American automobile companies Clear rules and certainty of market access under the North American Free Trade Agreement enable intra-industry trade and contribute to the U.S. automotive industry’s global competitiveness. In addition, they promote greater flows of trade and investment and allow the development of more efficient supply chains in the region. Automakers leverage comparative advantages in terms of labor and capital, as well as proximity, to streamline operations, lower costs of production, and deliver just-in-time, to benefit consumers across the region and worldwide. The high degree of integration between the United States, Canada, and Mexico enables U.S. automobile producers to effectively manufacture and compete as a regional bloc against others in Asia and Europe — all of which also rely on tightly integrated regional supply chains that include both developed and developing countries. Productive association with Mexico has allowed U.S. automakers to optimize their production processes, without which American automobile companies would have difficulties competing internationally. Furthermore, the removal of this coordinated association would limit their ability to focus on high-value elements of the supply chain, such as software development, industrial design, and the development of specialized and advanced components.7 The United States has reduced its manufacturing of automobiles in order to increase production of light trucks, which have a higher profit margin, but overall has still increased the total production of light vehicles. Specialization in the U.S. and Mexican automotive industries complements their respective markets. Mexico mainly produces small and medium automobiles, while the United States focuses on the production of vehicles with higher value in the market such as SUVs and light trucks. In fact, since 2012, 60% of Mexican automobile exports to North America have been of small and medium automobiles.8
U.S. Production of Light Vehicles (thousand units) Auto
14,000 12,000 10,000
Light Trucks
Total
11,685 10,035 8,652
8,000 6,000
6,078
4,000 3,957
3,033
2,000 2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
0
Source: OICA, Ward's automotive yearbook
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NAFTA 20 Years Later: Do the Benefits Outweigh the Costs?, Wharton School of Business at the University of Pennsylvania, Feb. 19, 2018 http://knowledge.wharton.upenn.edu/article/nafta-20-years-later-benefits-outweigh-costs/ 8 AsociaciĂłn Mexicana de la Industria Automotriz (AMIA).
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In 2017, North America together produced 17.4 million vehicles, positioning the region above Japan (9.7 million), on par with the European Union (17.9 million), and below China (29 million). Without Mexico and Canada, the United States’ production of 11.2 million vehicles would be substantially smaller than production in the European Union and China, and only slightly higher than Japan’s. Motor Vehicles Global Production (in million units) Japan, 9.7
Motor Vehicles Global Exports Share (in value) North America, 22%
Other, 23.3
North America, 17.4
EU 28, 17.9
Japan-South Korea-China, 19% Other, 9%
China, 29.0
EU 28, 50%
Source: SE with data from IMF, WTO, and OICA
The modern nature of global supply chains implies that half of the $131 billion in automotive industry trade between the United States and Mexico represents vehicle parts that are shipped back and forth across borders several times before being delivered to final consumers. In fact, Mexico is currently the top automobile parts supplier to the U.S. automotive industry, accounting for 40% of total U.S. sector imports, while the United States is Mexico’s top automobile parts supplier. In the last decade, the share of North American exports to the rest of the world has grown from 19% to 22%, faster than the average share increase in global automotive industry exports.9 This regional platform has also led to direct investment from Mexican companies into the United States, resulting in tens of thousands of jobs across the United States. Foreign direct investment in the United States by Mexico, as of 2016, exceeded $58 billion10, including investment in the manufacturing sector, making the United States the largest recipient of Mexican investment. For example, a Mexican-owned vehicle parts maker produces suspension components, springs, and disc brakes in Ohio and Michigan, while another produces aluminum engine heads and cylinders in Alabama. These and other Mexican companies are examples of the interdependent web of suppliers and manufacturers on which the North American automotive industry relies to compete globally. Mexico’s imports of high-value American made automobile parts have enabled the significant growth in the U.S. automotive industry. In 2017, U.S. automobile parts makers supplied over $19.8 billion in parts to the Mexican automotive industry, which was nearly one third of total U.S. automobile parts exports.11 This share of total U.S. parts exports has grown by 9
Scotiabank, NAFTA: Data at Odds with proposed Changes to Auto Rules of Origin, December 2017. FDI figures from IMF CDIS using outward positions (stock) data as of 2016. 11 Scotiabank, NAFTA drives auto industry amid global expansion, April 2017. 10
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50% in the last decade. U.S. content from multiple automobile parts suppliers is used not only by the Mexican plants of the Detroit Big Three, which are responsible for 45% of Mexican car production, but is also by all other automobile producers in Mexico.12 These exports support local jobs in companies throughout the United States. In April 2018, more than 586 thousand workers were employed by the U.S. automobile parts industry, nearly 200 thousand more than in June 2009, the lowest level after the financial crisis.13 In Texas, for example, employment in motor vehicle manufacturing has increased by more than 47% since June 2009, reaching close to 12,000 workers in May of this year. In Michigan, employment in motor vehicle manufacturing has risen by nearly 75% during the same period, while employment in motor vehicle parts manufacturing has also increased by 81%. Altogether, the parts and vehicles sector now employs over 171,000 workers in Michigan, nearly 75,000 more than in June 2009. Other examples include employment in motor vehicle parts manufacturing in Indiana and Kentucky, which increased 69% and 64% respectively. In supporting these jobs, Mexico has become the top export market for motor vehicles and automobile parts for nine U.S. states14, and the second largest export market for the same products for 21 states.15 Moreover, half of U.S. exports (one million out of two million) of new passenger vehicles in 2017 went to Mexico and Canada, valued at $26.7 billion.
Main U.S. State Exports of Automotive Products to Mexico $8.3 (2017, value in $ billions) $4.6 $3.3 $1.6 $1.5 $1.2 $0.7 $0.7 $0.6 $0.5
Source: Scotiabank, International Trade Centre
Source: Wisertrade, using NAICS
Due to the high level of economic integration between the United States and Mexico, U.S. inputs are used relatively more for Mexican exports of motor vehicles to the United States than in exports to other countries. The United States accounts for 74% of the foreign inputs incorporated into Mexican-assembled vehicles sold to U.S. consumers, while accounting for 18% of the inputs of Mexican-assembled vehicles sold to German consumers.16 As a result, U.S. value-added content accounts for 38%17 of the $47 billion in Mexican new passenger vehicles 12
NAFTA Briefing: Trade benefits to the automotive industry and potential consequences of withdrawal from the agreement, Center for Automotive Research, Jan. 2017. 13 Source: U.S. Bureau of Labor Statistics, using data from Current Employment Statistics survey for motor vehicle parts industry. 14 Texas, California, Arizona, Utah, New Mexico, Rhode Island, Connecticut, Florida, and Alaska. 15Arkansas, Georgia, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Michigan, Minnesota, Missouri, Nebraska, New Hampshire, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia, Wisconsin, Wyoming. 16 Source: Harvard University, Job Market Paper, Alonso De Gortari (2017). 17 Source: Harvard University, Job Market Paper, Alonso De Gortari (2017).
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and light trucks sold to U.S. consumers,18 the largest share for a foreign country in Mexico. The share of North American-produced value in Mexican motor vehicle exports to the world in 2015 was 84%19. Value-Added in Mexican Exports of Motor Vehicles (% share)
Foreign Inputs in Mexico’s Vehicle Exports to:
United States
German y
Canada, 2
Others, 16 Mexico, 45 U.S., 38
Source: Harvard University, Job Market Paper, Alonso de Gortari (2017).
Source: INEGI and Banxico.
A study by the Congressional Research Service concludes that “U.S. motor vehicle manufacturing retains a large base of U.S. component and assembly operations that has not been displaced by imports.”20 The imposition of protectionist measures that disrupt the tight trade linkages in automobile production among the North American countries would cause greater economic disruption than what would be expected based on traditional, lower degrees of international supply-chain integration. For example, a 2018 study by the Peterson Institute for International Economics found that if a 25% tariff were imposed on all foreign automobiles and automobile parts, 195,000 U.S. workers would lose their jobs. The tariffs would also result in automobile imports shrinking by 5.29%, exports dropping by 2.53%, and production slipping by 1.5%. Combined with current demand and low unemployment, an action of such magnitude could result in job losses as U.S. automobile makers accelerate automation and reduce variety to cut costs. It could also result in increased prices as automobile makers shift production costs to consumers. Furthermore, decreased variety and price increases could lead to higher consumer demand for imports from other regions that might still be competitive regardless of tariffs. Moreover, these tariffs would have ripple effects; first in industries directly connected to the automotive sector, and then throughout the economy. Mexico and the United States should continue to leverage opportunities of an integrated North American market The onset of automation in the automotive industry has resulted in increased demand for highly-skilled labor and specialization. Collaboration on cross-border training and education will allow the region to maintain a skilled workforce that can design, implement, monitor, and manage automation, and will maintain and generate jobs. 18
Source: United States Department of Commerce, Bureau of the Census, Foreign Trade Division. with the Mexican value added in the motor vehicles exports and the motor vehicle parts exports. Source: INEGI and BANXICO. 20 Canis, Villarreal, and Jones, NAFTA and Motor Vehicle Trade, Congressional Research Service, July 28, 2017 https://fas.org/sgp/crs/row/R44907.pdf 19 Estimated
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Asian countries are becoming major targets of automotive industry investment and expansion. Between 2007 and 2015, Asia increased the amount it spends on automobile research and development by 70%, and has become the world’s top destination for automotive research and development investment.21 Furthermore, automobile companies like Harley, Volvo, BharatBenz, etc., are building manufacturing facilities in developing nations such as India and China to control costs and mitigate shrinking margins. To compete, it is crucial to the North American industry to maintain a favorable environment by encouraging additional collaboration and providing the right incentives for Original Equipment Manufacturers (OEMs) and suppliers to further integrate their supply chains. As reported by McKinsey, there is increasing growth in the use of electronics in automobiles, resulting from electronification of drivetrains, the “consumerization� of automobile electronics, and vehicle intelligence (including active safety innovations and connectivityenhancing driving).22 This growth in the use of electronics offers an opportunity for to capitalize on the special advantages the North American region has in developing sophisticated electronics and software. Maintaining and facilitating regional cooperation is the most efficient and effective way to achieve this goal. Conclusion The North American automotive sector is a global success story that benefits U.S. consumers, manufacturers, and workers. It has achieved a level of integration that fosters innovation, increases the economic well-being of the sector, and provides a reliable source of vehicles for all purposes, including national security and consumer demand. As a consequence, Mexico is an important and reliable United States partner and, therefore, poses no threat to U.S. national security. As a partner of the United States, Mexico expresses its concern about the negative impact that this investigation could have in the North American region if trade restrictions are imposed without due regard to international obligations. As the Department is aware, in response to the trade restrictions imposed under Section 232 with respect to steel and aluminum, a number of countries, including Mexico, responded by adopting counterbalancing measures. Similar responses should be expected if the United States adopts trade restrictions on automobiles and automotive parts that are violations of the World Trade Organization, the North American Free Trade Agreement or other trade agreement obligations. The United States and Mexico should build on the strength and success of their existing relationship, rather than engage in a process that diminishes regional trade flows, undermines integration, and makes vehicle supply chains less reliable, less profitable, and inefficient. Mexico remains committed to working with the United States to address current and future challenges that our industries face.
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*
21
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Strategy&, 2015 Global Innovation 1000: Automotive industry findings, 2016, https://www.strategyand.pwc.com/media/file/Innnovation-1000-2015-Auto-industry-findings-infographic.pdf. 22 Parker and Thomas, Winning share in automotive semiconductors, McKinsey, 2013, https://www.mckinsey.com/~/media/mckinsey/dotcom/client_service/semiconductors/issue%203%20autumn%202013/pdfs/5_ automotivesemiconductors.ashx.
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