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OM in the News: Nafta and the Global Car Industry

November 15, 2016

auto-parts“Ending the 1994 Nafta trade pact is relatively easy,” writes The Wall Street Journal (Nov. 11, 2016). The U.S. legally can pull out of Nafta 6 months after notifying Mexico and Canada. But for the auto industry, such a change would be substantially more complicated because of the multilayered connections between U.S. and foreign suppliers and assembly points. The tens of thousands of parts that make up any vehicle often come from multiple producers in different countries and travel back and forth across borders several times.

This is a tenet of modern manufacturing: Where a product is ultimately assembled increasingly has little bearing on where its component parts are made. More than half the parts in the Ford Focus, for example, are made outside the U.S. and Canada, including 20% in Mexico. Ford also ships in some of the car’s engines from Spain and transmissions from Germany.

Similarly, only 10% of the parts that go into the 200,000 BMW luxury crossovers built each year in Spartanburg, S.C. come from U.S. and Canadian plants. The rest are imported from Europe and elsewhere. BMW in turn exports most of the crossovers around the world. By contrast, 70% of the components in the Honda CR-Vs assembled in Guadalajara, Mexico are currently made by U.S. and Canada-based factories. The parts that make up a car or truck, from bolts to motor blocks, window lifts to oil filters, account for 2/3 of its value.

“This industry, particularly in North America, has integrated a lot,” said a Federal Reserve economist. “You can’t buy an American-made car anymore. You can buy an American-assembled car,” adds a Ford veteran.

U.S. and Canada-based factories shipped $29 billion worth of parts to Mexico in 2015, while Mexican plants in turn sent more than $61 billion worth of parts to the 2 Nafta partners. About 1/3 of Mexico’s 1,300 suppliers, which employ some 720,000 people, are U.S. owned. Mexican, Asian and European parts suppliers provide jobs for nearly 600,000 Americans.

Classroom discussion questions:

  1. Explain the purpose of Nafta.
  2. Identify the 1st, 2nd, 3rd, and 4th tier suppliers in the attached seat graphic.
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