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NAFTA Restructuring Poised to Disrupt the North American Supply Chain Network
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Over the past 50 years, the North American automotive industry has become strongly integrated between Mexico, Canada and the United States. Canada and the US signed the Automotive Products Agreement in 1965, which led to the gradual reduction of trade barriers and paved the way for greater collaboration between Canada and automotive hubs in the states of Michigan and Ohio. A couple of decades later, Mexico also hopped onto the bandwagon, removing all trade barriers for foreign direct investments into its automotive sector.In order to further increase cooperation and facilitate greater synergies between the 3 countries, the NAFTA was created in January 1994, which led to the creation of a trilateral trade bloc in North America. This resulted in the reduction of trade tariffs between the 3 countries and allowed manufacturers and suppliers to establish manufacturing plants and assembly units in the most cost effective and strategic of locations. The NAFTA enabled billions of dollars of foreign direct investments into the 3 countries by overseas automakers who were trying to tap into the growing US automotive market. NAFTA also led to increased economic output. In the US, industries such as Automotive, Agriculture and services benefitted the most. The trade between the NAFTA members has been steadily growing since the mid 1990’s and hit $1.2 trillion in 2017, an increase of 6.5% as compared to the previous year.While NAFTA has led to positive trade and economic growth in the US, some experts have also highlighted its shortcomings as well. Critics of the trade deal argue that US jobs were lost to Mexico because of the significantly lower wages in that country as compared to US. Almost 80% of these jobs were from the manufacturing sector, with the worst hit states being California, Texas, Michigan and New York. Critics also argue that NAFTA resulted in the lower wages in the United States as labour unions lost their ability to bargain for higher wages. Companies in the US used the threat of moving to Mexico, to keep the wages suppressed. Since the beginning of the current US Presidential term, there has been sustained clamour to restructure the NAFTA to address its perceived shortcomings and bring back manufacturing jobs to the US. This Market Insight analyses the recent trade deals which were forged by the Trump administration with Mexico and Canada and its impact on the North American automotive landscape, from various perspectives
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