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Sunday, January 8, 2017

A look at trade and why we need it...

As a rule, more trade is good. I don't question there are issues to be worked out (e.g. Chinese currency manipulation and theft of software), but as a firm rule it is better for all aides.

Donald Trump states he will place tariffs on goods from American headquartered companies with factories in foreignh countries. See Carrier and Ford. But this is an excellent article on why companies go to Mexico. And it's not only for the cheap labor.
Why Trump Tariffs on Mexican Cars Probably Won’t Stop Job Flight

President-elect Donald Trump says he wants automakers to build cars they sell in the U.S at home or pay a hefty tax. On Tuesday he criticized General Motors for building the Chevrolet Cruze hatchback in Mexico. And during the campaign, he called for a 35 percent tariff on autos produced south of the Rio Grande. But it may be more free trade, not tariffs, that would help the U.S. keep some factory jobs from moving south.

After Trump criticized GM, Ford said it would scrap plans to build a $1.6 billion plant in Mexico and build its Focus compact car at an existing facility there. Despite that, U.S. automakers Ford, GM and Fiat Chrysler are planning to manufacture almost 1 million more cars in Mexico by 2022, according to LMC Automotive, while building half a million fewer cars in the U.S. They're not alone. Over the past five years, automakers have rushed to build factories in Mexico. The largest car companies have announced at least $22 billion in investments and about 25,000 jobs at new or expanded plants in Mexico by 2019. And that’s just the jobs that have been made public.

Cheaper labor is only one reason Mexico has seen a surge in new-car production. While the country’s low wages have been the big attraction, one of its key advantages is that it has trade agreements with 44 countries, giving automakers access to half the global car market tariff-free. The U.S. has similar trade deals with just 20 countries, which make up 9 percent of global car sales, according to the Center for Automotive Research in Ann Arbor, Michigan...

So basically we have an economic competitor making their products cheaper to export and it cheaper to do business. And that drives economic activity, which increases employment, increases tax revenue, lowers the cost of goods, and makes people prosperous. Who would have thunk it!
...Ford spokesman Karl Henkel said that Ford's decision to build its Focus compact and Fusion sedan in Mexico "is not solely tied to whichever agreement has the lowest tariffs." He did say that low cost is important, especially in Mexico, but location of the plants relies on multiple factors.

To get a better sense of Mexico’s advantage, consider a $25,000 midsize sedan built and shipped in Mexico with one in the U.S.

Automakers can pay Mexican workers a lot less. Total hourly compensation in the motor vehicle manufacturing sector is about 80 percent less for Mexican workers compared with that for U.S. workers. Considering assembly time for a typical midsize car, an automaker can save $600 per vehicle on labor costs.

Infrastructure in Mexico lags behind the highway and rail network in the U.S., so it actually costs automakers $300 more per car in additional shipping expenses to produce the vehicle in Mexico and ship it to Europe, and an extra $900 to ship it to the U.S.

That means, even after paying significantly less on labor, a car company is walking away with wage savings of only $300 per car—a fraction of what it costs to build and ship in the U.S. The bulk of the savings are tied to Mexico’s trade agreements and cheaper parts.

Automakers can save $1,500 per car on cheaper Mexican auto parts. Certainly, a lot of those savings are tied to the lower wages workers in Mexico are paid. But some of these parts are imported to Mexico tariff-free from countries in Europe and Asia, particularly for the foreign automakers who are increasingly investing in Mexico instead of the U.S. Since the U.S. doesn’t have as many free trade agreements, some of the automakers would pay extra for some of those parts if they made those models in the U.S., said Bernard Swiecki, senior analyst at CAR.

The same company selling that mid-sized car saves $2,500 per vehicle that it builds in Mexico and ships to Europe because the U.S. doesn't have a trade agreement with the EU. That's more than it saves in parts and wages once shipping costs are figured in.

So, in total, an automaker saves more than $4,000 by building and shipping a car from Mexico to Europe instead of from the U.S. If Trump could match those trade deals, he would erase an average $2,500-per-vehicle cost advantage over American-made midsize cars...

The article is excellent and this is about half of it. The point, traders good for industry, employees, and consumers. Hopefully we don't get into a trade war anytime. It won't take much for the economy to go up after the abuse of the last 8 years. If Trump goes down the protectionist route, he can blow this and have the Dems everything in 2-4 years.

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