by Dr. John Scott, professor of economics, Mike Cottrell College of Business
Nissan found a strategy to cut its cost of producing and selling a $50,000 car by $5,000. In business, such efficiency is too big to pass up. On the other hand, when Ford ships from the United States to Europe, Ford has to pay that extra $5,000 as an import tax. Since Nissan produces in Mexico, which has trade agreements with Europe, they do not pay a $5,000 tax.
How can Ford profitably export cars if they start with a ten percent disadvantage? Ford uses robotics – but so does Nissan. Ford uses more educated American workers – but they are also more expensive. And there is nothing Ford can do about the fact that U.S. regulations are thousands of times more restrictive than that of Mexico’s – except move to Mexico.
Keep in mind, it isn’t just Nissan and Ford competing in the world’s auto markets. Audi, Volkswagen, Daimler, Kia, Mercedes as well as others take advantage of Mexico’s trade deals to lower their cost of selling cars. Moreover, it is not just auto companies who produce in Mexico due to the advantage of more free trade. For example, Carrier, the U.S. heating / air company, is producing in Mexico to take advantage of Mexico’s trade deals. Ford, Carrier – All U.S. Manufacturers – need the United States to make more trade deals if they are going to compete with foreign companies.
Those worried about U.S. jobs might ask: What is the point of competing in world markets if it means jobs are moved from the United States? Here is a point to consider: for every dollar’s worth of goods that we import from Mexico, forty cents of that dollar originated in the United States. That is, we might import furniture made by a Mexican company who used U.S. wood. If we stop Mexico from adding sixty cents of value, then we stop the U.S. from adding forty cents of value.
Also, U.S. producers import inexpensive resources from other countries, which lowers their costs of production. These lower costs mean lower prices for U.S. consumers, and also means that U.S. companies can better compete as they sell in world markets.
Still, some people focus solely on “buying American.” However, doing this might require more than just looking at the make and model of a car. Here is why: in 2016, the five cars that used the most American parts and resources were, in order, the Toyota Camry, Honda Accord, Toyota Sienna, Honda Odyssey and Honda Pilot. On the other hand, cars viewed as “American made” are often made with a larger percentage of foreign parts.
This goes to show that today’s production is world-wide. The components of Boeing’s planes are made all around the world. If we require that those planes be made in America, then more of us will ride on Europe’s Airbus planes as airlines purchase cheaper aircraft to compete on lower costs. The U.S. can get in the game by letting our companies compete, or we can watch as others supply the world’s goods.