Each year, the factory of ITB Precisietechniek, a Dutch manufacturer, produces hundreds of millions of its products at its plant in Querétaro, a prosperous industrial city some 150 miles northwest of Mexico City.
The plant is what those in the auto industry call a “tier two” manufacturer. Its machines mold plastics into components, which are then shipped off to a different company that uses them to produce car parts. Those, in turn, will end up in cars sold to U.S. consumers.
“Business has been good,” general manager Pieter de Korver told FOXBusiness.com. “We’ve expanded our facility last year and have enjoyed continued growth over the past few years.”
ITB’s plant, located on an industrial park on the outskirts of the city, is just one of the many hundreds of manufacturers that form the complex supply chain of the Bajío cluster. The region in Central Mexico is the heart of Mexico’s automotive industry. A large chunk of the 3.6 million cars the country produces each year are made here. Most of them are shipped to the United States.
It took Donald Trump only a few updates on Twitter to throw this thriving industry into disarray.
In a series of comments posted in the first week of January on his social platform of choice, the U.S President-elect threatened to slap “big border taxes” on several major international carmakers, in an apparent attempt to coerce them into moving production to the United States.
After first berating General Motors for sending its “Mexican made model of Chevy Cruze to U.S. car dealers-tax free across the border” on January 3rd, Trump thanked Ford the next day for cancelling a planned $1.6 billion investment in a plant in San Luis Potosí state, scrapping 2800 jobs in the process.
Next on his Twitter-hit list was Toyota, which was threatened not to build a new plant to produce its Corolla model in the northern Mexican state of Baja California, again under penalty of a “big border tax.”
Even if the President-elect didn’t always have all the details straight– the new Corolla plant will be built in the state of Guanajuato, in the Bajío, while an already existing factory in Baja produces Tacoma trucks - the threats sent a nationwide shiver through Mexico’s automotive sector.
“We’ll have to wait and see what happens, but his comments certainly caused a stir,” said Pieter de Korver. “I’ve never experienced such a sudden change in politics, someone willing to act the way Trump does.”
Should the President-elect make good on his promises to slap punitive taxes on carmakers operating in Mexico, one of the country’s most successful industries would come under serious threat. Over the past two decades, few places in the world have seen its auto industry blossom as it did here.
Since the North American Free Trade Agreement (NAFTA) tore down trade tariffs between Mexico, Canada and the United States in 1994, direct employment in the sector has grown to almost 900,000 jobs. Including secondary manufacturers like ITB, the total number of jobs rises to 1.7 million.
Mexico is now the seventh-largest carmaker in the world and the third-largest in the hemisphere, with the sector accounting for almost a fifth of its manufacturing industry. Growth is set to continue; in a recent investigation, Bloomberg stated that major carmakers have announced at least $22 billion in investments and about 25,000 new jobs in Mexico in the next three years.
It’s easy to see why. Hourly wages in the auto industry are more than $45 in the United States, but only around $8 in Mexico. Moreover, Mexico’s 44 free trade treaties place it firmly in the center of global free trade, which, according to Bloomberg, saves manufacturers $4,300 per manufactured car, including the advantage of lower wages.
“Mexico’s comparative advantage isn’t so much in its labor force or low wages, but rather its liberated trade relations with 44 countries,” Manuel Molano of the Mexican Institute for Competitiveness (IMCO), a Mexico City-based think tank, told FOXBusiness.com. “The United States is far less open than Mexico.”
Mexico’s growth has come at the expense of the U.S. auto industry, which has been hard hit by the growing number of jobs and revenue dollars moving south of the border.
But in Mexico, in regions like the Bajío, the car boom has brought extraordinary economic growth of up to 5%, more than twice the national figure. Since the early 1990s, cities like Querétaro and Aguascalientes have transformed from sleepy provincial towns into buzzing urban centers. Querétaro alone doubled its population since the mid-1980s. It now has a standard of living twice as high as the national average.
Trump’s threats, however, also made apparent the fragility of the bonanza. Ford’s decision to cancel its plant in San Luis Potosí, north of Querétaro, came as a harsh blow to the state that was predicted to become the next auto hotspot in the country.
“Ford’s announcement to cancel the plant here was a very unpleasant surprise. It’s bad news for the state and bad news for Mexico,” San Luis Potosí’s state Secretary of Economic Development Gustavo Puente Orozco told FOXBusiness.com. “It means we’ll have to revise our growth projections. The effect will not only be felt in the car industry, but in the economy as a whole.”
Officials such as Puente admit there’s not much local governments in Mexico can do to mitigate the immediate effects of Trump’s threats. States like San Luis Potosí already reel investors in with incentives such as the reportedly more than $150 million BMW collected to build a plant in the state, or the 10% participation of the northern state of Nuevo León in the construction of a massive $2 billion plant by Korean carmaker Kia Motors.
Once the dust over Trump’s Twitter-comments settles, however, most industry insiders predict the growth of Mexico’s auto sector will most likely continue. The advantages of investing in Mexico are just too great for major international manufacturers to pass on. Indeed, German carmakers BMW, Audi and Volkswagen on Monday said they remain committed to their investments in the country.
“Everything Trump is saying is to get people going, but once reality sets in it’ll become clear that it’s practically impossible to scuttle the industries boosted by NAFTA,” said Sergio Ornelas, editor of business magazine Mexico Now and organizer of the yearly Mexico Auto Industry Summit. “It would take at least five years to modify NAFTA. Starting a trade war or leaving NAFTA would be crazy. It could even cause a recession in the U.S itself.”
Experts say Mexico should just stay quiet until the dust settles.
“The U.S. can’t win this by raising tariffs, that wouldn’t make much sense,” he said. “But it’s also important for Mexico to show the world it continues to act like a civilized trading partner. NAFTA compelled Mexico to refrain from behavior like expropriations, which has given investors peace of mind. We need to show the world that we can continue with such policies, with or without NAFTA.”