Could Changes to NAFTA Hurt U.S. Consumers?
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A new study alleges the proposed border adjustment tax and withdrawal from the North American Free Trade Agreement (NAFTA) may not achieve President Donald Trump’s goals of keeping manufacturing jobs in the U.S. and may have negative unintended consequences. The Reuters report regarding the study's release suggests changes could drive up the cost of new vehicles.
Manufacturers and suppliers have been careful in managing capacity since the recession and the current manufacturing base across North America is operating at 110 percent capacity. The study presumes these would simply cut operations at the existing manufacturing base as demand shrinks. As costs go up under the weight of border tax or NAFTA tariff, manufacturers would most like respond by reducing the content on the vehicles they sell, which would put substantial pressure on suppliers who provide the sophisticated safety equipment found on modern vehicles.
The border adjustment tax is a byproduct of corporate tax reform. In concert with lowering corporate tax rates to fifteen percent from twenty percent, the BAT would impose at least a fifteen percent tax on imports while exempting the value of a company’s exports from business taxes.
Analyzing the implications of a fifteen percent BAT on the motor vehicle industry, the BCG study claimed that U.S. automakers (OEMs) and suppliers would pay $34 billion in import taxes annually while realizing only $12 billion in export benefits. The shift could lead to an average $1,000 increase in per-vehicle manufacturing costs at the top twelve OEMs selling cars in the U.S.; a 20 percent BAT would add an average of $1,800 to per-vehicle production costs.
The study, commissioned by the Motor & Equipment Manufacturers Association (MEMA) and conducted independently by the Boston Consulting Group (BCG) examined the real-world implications of a border tax and changes to NAFTA on the motor vehicle sector, which now depends on an integrated supply chain the depends on plants in Canada, the U.S., and Mexico.
The BCG study claims that manufacturers and suppliers would not respond to the border adjustment tax (BAT) or changes to NAFTA by bringing jobs back to the U.S. It takes nine years to recover the cost of building a new plant and plants in business now are under pressure to reduce capital expenditures, manufacturers, and suppliers. The study indicated that they would probably simply continue operating existing factories rather than building new plants in the U.S.Manufacturers and suppliers have been careful in managing capacity since the recession and the current manufacturing base across North America is operating at 110 percent capacity. The study presumes these would simply cut operations at the existing manufacturing base as demand shrinks. As costs go up under the weight of border tax or NAFTA tariff, manufacturers would most like respond by reducing the content on the vehicles they sell, which would put substantial pressure on suppliers who provide the sophisticated safety equipment found on modern vehicles.
The border adjustment tax is a byproduct of corporate tax reform. In concert with lowering corporate tax rates to fifteen percent from twenty percent, the BAT would impose at least a fifteen percent tax on imports while exempting the value of a company’s exports from business taxes.
Analyzing the implications of a fifteen percent BAT on the motor vehicle industry, the BCG study claimed that U.S. automakers (OEMs) and suppliers would pay $34 billion in import taxes annually while realizing only $12 billion in export benefits. The shift could lead to an average $1,000 increase in per-vehicle manufacturing costs at the top twelve OEMs selling cars in the U.S.; a 20 percent BAT would add an average of $1,800 to per-vehicle production costs.
