Border tax, NAFTA exit could harm U.S. auto industry, says study by BCG

19 July, 2017

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Imposing a border adjustment tax or withdrawing from the North American Free Trade Agreement would increase the price of vehicles in the U.S. market to the point that consumers would have to forgo certain features in order to afford their products of choice, hence diminishing employment in auto supplier factories. Both measures would likely fail to achieve the goal of reversing the trend of offshoring manufacturing to low-cost countries and could potentially harm the U.S. motor vehicle industry, according to a new study by The Boston Consulting Group (BCG).

A 15% border adjustment tax (BAT) would translate into an average US$ 1,000 increase in per-vehicle manufacturing costs at the top 12 automakers selling cars in the U.S.; a 20% BAT would add an average of US$ 1,800 to per-vehicle production costs.

To minimize the impact on their spending and hit a price point they can afford, consumers would likely forgo certain features like advanced safety and driver-assist technology, rearview cameras and automatic braking and parking functions. This measure would diminish motor vehicle industry employment in the U.S. Three percent to five percent of the jobs in U.S. supplier factories —20,000 to 45,000 positions— could be impacted, BCG estimates.

Meanwhile, withdrawing from the North American Free Trade Agreement (NAFTA) would translate into a US$ 650 average increase in per-vehicle production costs if a 20% tariff on Mexican imports is applied.

The automaker that is most reliant on imports would see its per-vehicle costs rise by an average of US$ 1,100, while the company least dependent on imports would face an average US$ 100 markup per vehicle, according to BCG’s analysis. As a result, car buyers could reduce as much as 6% in supplier content —and 25,000 to 50,000 positions in U.S. supplier factories.

The study, commissioned by the Motor & Equipment Manufacturers Association (MEMA) and conducted independently by BCG this spring, examined the real-world implications of a border tax and changes to NAFTA on the motor vehicle sector —how they would impact new-vehicle and supplier costs, new-car features and prices, consumer purchases, jobs, and trade.

A border tax or withdrawing from NAFTA is intended to create conditions that encourage the expansion of U.S. automotive factories and reshoring from other countries, but macro trends in the global auto industry work against that outcome, says BCG.

Calculating production cost changes for two automobile interior components, BCG found that a part costing US$ 15.30 per unit to assemble in Mexico would cost US$ 2 more to make in the U.S., including the savings from avoiding the 15% BAT. The increase would chiefly be due to higher labor costs.

Production costs for a US$ 100 part would drop by about US$ 11 per unit if manufacturing were shifted to the U.S. from Mexico. But at that rate, it would take nine years to pay back a US$ 50 million factory investment in the US, well above the three-year return on investment period that manufacturers typically aim for.

The study also outlines six steps that political leaders and policymakers could consider as alternative ways of enhancing US competitiveness in the industry:

- Infrastructure. Invest to overhaul and modernize the nation’s highways, bridges, and ports.

- Trade. Provide tougher enforcement of “fair trade” policies and enhanced protection of U.S. intellectual property abroad.

- Tax Policy. Increase the attractiveness of repatriation of accumulated foreign earnings.

- Workforce Development. Invest in building a workforce equipped with the skills needed for the manufacturing jobs of tomorrow.

- Corporate Average Fuel Economy (CAFE)/Greenhouse Gas Emissions. Harmonize standards across agencies and retain and increase off-cycle technology credits.

- Safety Standards. Update the New Car Assessment Program (NCAP) to include information about crash avoidance and pedestrian protection features as part of the 5-star ratings.

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