The Tariff Advantage of Mexico

Adapted from a post by Griffin Cook on the Econ 244 blog, May 18, 2013

Audi's decision to place the plant that will build the new Q5 crossover in Mexico resulted from more than cheaper labor and government incentives. After all, assembly is likely 10% or less of manufacturing costs, and direct labor only one piece of that. Inventives are even less a factor – what big greenfield plant wouldn't likewise enjoy incentives if located in the US? (See an August 13th Bloomberg story on efforts to recruit car-related factories in the US.) So other considerations likely dominate.

According to CEO Rupert Stadler, Europe's growing interest in SUVs and and crossovers played a key role. The European Union slaps a 10 percent tariff on U.S.-built vehicles, which would have cost Audi more than $3,000 per vehicle – and only 25% of the plant's cars will likely be sold inside NAFTA. A majority will instead be headed for the European Union.

This is part of a growing trend in which cars are produced in a foreign country and then exported to the home country, in part due to cheaper labor costs and flexibility in trade laws, but also access to a supply base and to hedge foreign exchange risk. This presents a problem for the European Union, with production in its periphery, outside the Euro zone.

So watch for what happens in the newly launched trade talks between the US and the EU, the Transatlantic Trade and Investment Partnership. Lowered tariffs would help the US. And another component is homologation, which might lessen the divergence in safety and testing standards that mean that Audi and BMW (whose South Carolina plant exports 70% of its output) must produce slightly different products for different markets – variations in headlight standards, how emissions are measured, and on and on.

Sources:

• Automotive News Europe May 17, 2013: Tariff played a role...
• TTIP – Official EU Site
• TTIP – Official US Site

Reverse Import Deja Vu?

...a strong yen should boost exports to Japan...

In 1992 I wrote a paper about Japanese car imports, later picked up by the Economist, in Japanese by Toyo Keizai (東洋経済) and by the MIT International Motor Vehicle Program about the growth of Japanese car imports. Ah, but what news was in that? Well, I was writing about "reverse" imports by Japanese of their cars from the US to Japan, alongside the sales of German firms, the only foreign companies to set up proper dealership networks and import processing infrastructure. The recent strength of the yen against the US dollar and particularly against the Euro, made me wonder if we will see a return to that era.

A headline in the May 24th Sankei Shinbun web site thus caught my eye: Mercedes-Benz will sell the "Smart for Two" for ¥1.59 million (US$19,992; €15,950), about a 14% reduction in price. Other forthcoming models of M-B and BMW will likewise carry lower sticker prices or add a lot of options without raising the price. Now the article doesn't make it clear whether the base is appropriate -- it uses year-on-year comparisons, and in general spring 2011 was not a normal time. Still, it cites rises of 37% for M-B and 27% for BMW.

I've only glanced quickly through recent data: given the volatility of the global economy in general, and the post-3/11 economy of Japan in particular, I was expecting to find the data too noisy to interpret. That's not the case.

First, overall imports are at the highest level in the years for which I have (FY1999 to present), even though at 4.0 million cars FY2011 sales are 10% below their mid-2000s level (and 20% below the 5.1 million unit sales peak at the top of Japan's bubble in 1990).

Second, while the German firms are doing OK, both BMW and Mercedes are down from 2007 and the onset of the global recession; only VW and Audi show signs of a sustained increase. What really is driving the increase is Nissan, which now accounts for about 17% of imports or 50,000 units. This is surely consequent to their moving the production of certain vehicles (such as the March) entirely out of Japan.

Still, total imports of 295,000 units remain rather short of the 393,000 level of 1996. While the Japanese media may be full of hand-wringing about the impact of the yen, the evidence so far is modest, when looked at through the lens of vehicle imports. Realistically, it's probably too soon to tell; vehicle sales strategies are penciled in a couple years in advance. We aren't seeing "reverse imports" of Japanese-brand cars from the US -- yet. So from that perspective we're also not back in 1996, when 85,000 Toyotas and Hondas went westward across the Pacific. But it is worth watching.

Source: 「１５９万円のベンツ 円高追い風、価格抑え輸入車加速」 which freely translated says "Fanned on by the strong yen, a Benz at ¥1.59 million will accelerate imports." From sankei.jp.msn.com of 25 May 2012.

...Mike Smitka...