In the past, Harold Sirkin said that, as the global business environment has become more complex, the competition does not take place between companies, but between supply chains. In order to thrive in the market, it is no longer enough to just sell the best product or have the best brand. Nowadays, the success of businesses depends on their ability to efficiently integrate themselves into global production chains that allow them to get their high-quality products on the market, at a lesser price and in a timely manner.
NAFTA has favored precisely this type of integration in our region: by reducing or eliminating custom tariffs, production chains have been reshaped in search of the best possible efficiency, pinpointing every stage of the production chain in the best location for that function to be carried out.
How much would a NAFTA exit cost us?
A prime example is the automotive industry, which favors our country for the installation of their global assembly plants for export due to the low-cost skilled labor we offer. Even though the final assembly is carried out in Mexico, several automotive components cross the border more than once as production supplies. This results in an integrated global chain which benefits from the various levels of expertise in each economy in order to create the highest added value.
Actually, designing and manufacturing an engine can be done in factories in the USA, using electronic supplies from Canada or Mexico. The engine is then sent to a factory in Mexico to be finally assembled into a car, which will cross the border once again to be sold in the USA or Canada. Our country also provides car parts used for final assembly in the USA. These cars are sold to other markets such as Europe and Asia.
Furthermore, regional integration offers huge logistical benefits due to the close geography of our markets: a car that leaves the production line in a factory in Mexico may arrive in the United States within a matter of days; whereas a vehicle imported from China can take several weeks to arrive. The overall picture of the industry is far more complex, as various supplies used in assembly plants in Mexico originate from other important economic regions such as Asia or Europe. Nevertheless, the highest added value occurs inside NAFTA, with final production in Mexico.
This was shown in a recent study by the Center of Automotive Research (CAR), whose analysis reported that it was US$1200 cheaper to produce a car in Mexico to be then sold in the USA, rather than to produce it directly in the USA; and US$4300 cheaper to produce the same car in Mexico, rather than in the USA, to then sell it in Europe (this is for cars with an average sale price of US$25,000). These savings result from quantifying the differential costs from manufacture, parts import, transport to the destination market, and the tariff advantages at NAFTA terms.
The trend will continue, with or without NAFTA
The potential scenario is how companies take advantage of the differences between countries and manage to adapt efficiently to ensure success in the global markets. This partly explains why the manufacturing activity in the United States has declined in the last 30 years, certainly favored by NAFTA, but mainly due to the search for efficient production chains. This was initially achieved by moving an important part of the production from the USA to China, and due to recent economic changes, to Mexico.
The USA will unquestionably remain a manufacturing power, but mainly for highly-specialty parts and products, as well as continuing in their role as a hotbed for research, innovation and design. This trend will continue for our northern neighbor in the next few years, with or without NAFTA, but it would certainly be more beneficial for the region’s production chains if the current NAFTA remains in place.