The Effect of NAFTA on the US Auto Industry

As the global economy has matured, and competition and trade deficits have soared out of control, there have been actions taken by much of the industrialized world in an effort to balance the scales so to speak and provide equal opportunities for all of the trade partners involved in international transactions. An example of this is the North American Free Trade Agreement, or NAFTA. While NAFTA's intention has been to create a trade balance, there have been other side effects; this is especially true in the United States auto industry. In this paper, the cause and effect of NAFTA on the US auto industry will be explored in order to better understand the situation overall.

The Premise of NAFTA in the Auto Industry

Ostensibly, NAFTA was enacted with the end goal of giving the major industrial nations of North America, namely Mexico, Canada and the United States, the ability to competitively compete with the rest of the world, and conduct business in such a way that each of these nations would mutually benefit (Koechlin, et al, 1992). Quite literally, the idea was for the nations to work together rather than trying to undermine one another, thereby providing a level of strength in numbers. Especially, this was envisioned for the automobile industry of the US, with NAFTA being used as the catalyst to allow the US to export automobiles to Mexico and Canada, increasing the market for American automobiles, and giving the often struggling industry a chance to revive and grow from where it was originally struggling in light of foreign competition, cheap labor from other nations, and so forth. However, the reality is that NAFTA achieved exactly the opposite effect when discussing the US automobile industry.
History of the US Automobile Industry Leading up to NAFTA

Traditionally, the US enjoyed dominance of the automobile industry due to mass production techniques, a ready supply of labor, and the might of the "big three" automobile manufacturers- Ford, General Motors and Chrysler. After World War II, this dominance began to slide in the midst of the rise of Japan and other nations who prospered in the post-war reconstruction period. In the modern age of the US automobile industry, however, to best understand the situation, one must go back to the early part of the 21st century; despite other economic disasters like the dot-com collapse, the American automobile industry still remained strong (Yang, 1995). Like so many other industries, however, the events of September 11, 2001 changed all of that. Borders tightened and the face of global trade changed. Specifically, for the US automobile industry, some of the contributing factors that placed an excessive burden on them were soaring transportation costs, insurance costs, and the like. Directly relating to NAFTA were likewise some very specific effects.

NAFTA had intended to create equal economic opportunity through the promotion of free trade; however, the rippling effect of NAFTA actually brought about a whole new set of problems. From the viewpoint of the US, the lowering of import restrictions allowed Mexico and Canada to flood American markets with vehicles that were cheaper to produce, and therefore sold at a lower price and commanded a larger market share. Faced with this increased competition and lower revenues, the US automakers in many cases ended up actually closing manufacturing facilities domestically and opening facilities in Mexico and Canada to take advantage of the lower priced labor themselves. Also in the US, many of the manufacturers of components used in the final assembly of automobiles were destroyed by a glut of lower priced materials coming from the other nations that benefited from NAFTA much more than did the US in many ways (Klier, 2005).

Additional Damage NAFTA Inflicts on the US Automobile industry

Actually, NAFTA also hurt the US automobile industry from yet another fascinating angle; because of the increased need for labor in Mexico and Canada to operate the automobile manufacturing plants, many of which were in fact opened by the US automobile makers themselves, encouraged many people to leave the rural areas and come to the cities where the better paying, while not great paying, jobs were to be found. This in turn led to inflated prices for produce and other such items because of the increases in labor costs (Koechlin, et al, 1992). More importantly, and tragically for the US automobile industry, this influx of labor only served to keep wages and costs low for the foreign manufacturers, making it even harder for the US to try to compete.

Summary

NAFTA, when first unveiled, held a great deal of promise, at least theoretically; however, in the final analysis, once the program took hold, the results were quite the opposite. In closing, perhaps the most important lesson to take away from this situation is that free trade is never totally free-someone always pays. Unfortunately, in this case, the US automobile industry has been forced to foot the bill.

References

Klier, T. (2005). Determinants of Supplier Plant Location: Evidence from the Auto Industry. 2+.
Koechlin, T., & Larudee, M. (1992). The High Cost of NAFTA. Challenge, 35(5), 19+.
Yang, X. (1995). Globalization of the Automobile Industry: The United States, Japan, and the People's Republic of China. Westport, CT: Praeger Publishers.