In April, Donald Trump called this decision “a disgrace.” That hasn’t stopped Ford from shifting its compact-car manufacturing south of the border. The Washington Post reports that Ford wants people to know that it will still keep its plants open in Michigan for other models, but does that answer the criticism?
Ford Motor will move all U.S. production of its small cars to Mexico, chief executive Mark Fields confirmed Wednesday, despite criticism from Republican presidential nominee Donald Trump of the company’s plans for expansion south of the border.
“Within the next two to three years, the majority of our small vehicles will be produced in low-cost areas,” Fields told investors at an event on Wednesday. “In North America, we will have migrated all of our small car production to Mexico and out of the U.S.”
The company first announced the plan last year. The Mexican expansion will not affect U.S. workers, a Ford spokeswoman said. The company will shift production of its Focus models across the border, and the Michigan plant where those cars are made now will build other vehicles.
That sounds good, except that it ignores the obvious alternative. Why not expand plants in the US and build all of their models in the US? Other manufacturers have saved costs by opening plants outside of Michigan, primarily in the South, where right-to-work labor laws help avoid the conflicts with unions. That would at least allow for more manufacturing jobs in the US, rather than shipping them across the border.
Ford won’t do that, for equally obvious reasons. Even with lower labor costs in other areas of the US, costs are still too high when compared to Mexico. Our free-trade agreement means that Ford won’t have to pay a penalty for outsourcing the jobs as long as they stay in North America. With competition tight in the compact markets and price the biggest consumer concern, leaving those savings on the table puts them at a competitive disadvantage, especially to automakers from Japan and Korea.
Trump and his team will no doubt seize on this as a major campaign issue, and it’s smart to do so. However, this may not be a great platform from which to launch attacks on NAFTA and other free-trade agreements. The problem here may be more a lack of free trade rather than a surfeit of it, and Mexico is benefiting from outdoing the US in free trade:
Automakers also locate new plants in Mexico because it has far more trade agreements than the United States, meaning that automakers can avoid paying burdensome tariffs on cars manufactured in Mexico. For example, automakers must pay a 10 percent tariff on cars exported to Europe from the United States. They must pay a 35 percent tariff on cars sold in Brazil.
In a report published last month, Swiecki and a colleague estimated that the labor to assemble a Ford Fusion would cost about $600 less in Mexico than in Michigan. If the car were sold in Europe, the tariffs would be about $2,500 less.
In other words, 80% of the savings come from Mexico’s free-trade advantage over the US. Ford’s not the only manufacturer noticing this either. Volkswagen already moved its Audi luxury vehicle line to Mexico three years ago, a car line that is popular in Europe and the US.
Trump will get a lot of mileage off the Ford Focus, but the actual lesson might be that we need more free trade rather than less. This is one example of the potential damage a protectionist turn in the US might do to our already beleaguered manufacturing sector.