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  • James MacDonald | Bloomberg: Vehicles sit parked near freight trains in a rail yard in this aerial photograph taken above Toronto on Oct. 2, 2017.

Monday, September 24, 2018 5:20 pm

Fact check: President Trump's claims about NAFTA and the US auto industry

SALVADOR RIZZO | Washington Post

Editor's Note: Today fact-checking organizations in the United States, Mexico and Canada are simultaneously publishing fact checks on the North American Free Trade Agreement. President Bill Clinton launched his push for approval of NAFTA 25 years ago this month, and President Donald Trump has vowed to scrap or overhaul the agreement. This project was hatched during a regional discussion at the fifth annual worldwide gathering of fact-checkers in Rome. -- Glenn Kessler

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"We lost thousands of factories and millions of jobs because of NAFTA -- thousands. Think of it: Thousands of factories, millions of jobs. We're turning it around. Already, Chrysler is coming back with auto plants. Many companies are now in Michigan, Ohio, different places, Pennsylvania. They're building beautiful, brand-new auto plants. Nobody thought they'd ever see that happen." -- President Trump, in remarks at the White House, April 12, 2018

NAFTA transformed the U.S. auto industry by lifting Mexico's restrictive trade barriers and enabling automakers to spread out their supply chain and production facilities across North America.

This means Canada, Mexico and the United States operate as an integrated auto market, with all three countries generally getting a piece of the action when a car is sold.

Most economists see this as an efficient setup that keeps automakers based in North America globally competitive. For example, relatively low-cost labor in Mexico helps North America compete with low-cost labor in Asia.

But Trump complains that NAFTA's costs -- "thousands of factories and millions of jobs" -- have been too steep for U.S. workers. He then goes on to say that things are picking up now that he's president, with new auto plants cropping up in several states along the Rust Belt.

Trump has a habit of exaggerating NAFTA's effect on the U.S. economy. Such claims appear 46 times in The Fact Checker's database of Trump's false or misleading statements.

The president also tends to boast, in some cases falsely, that new factories are being built. So how do these claims about NAFTA and the auto industry measure up?

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NAFTA took effect on Jan. 1, 1994, lifting tariffs and other trade barriers across Canada, Mexico and the United States, among other measures.

As a result of NAFTA, the three countries constitute an economically integrated market, especially for the auto industry.

Auto parts and vehicles produced in each country freely flow over the borders, without tariffs or other restrictions, as thousands of part suppliers serve the automakers that build the vehicles. This is known as the "motor vehicle supply chain."

There's no question that manufacturing has declined in the United States in the intervening years. Since 1994, the United States has lost about 4 million manufacturing jobs, and tens of thousands of factories have closed, according to Bureau of Labor Statistics and census data.

But NAFTA is not the only significant development in those 24 years, so its effect on the U.S. economy is difficult to isolate.

"A major challenge in assessing NAFTA is separating the effects that came as a result of the agreement from other factors. U.S. trade with Mexico and Canada was already growing prior to NAFTA and it likely would have continued to do so without an agreement," according to a May 2017 report by the nonpartisan Congressional Research Service.

"Since NAFTA's creation, American auto production has increased by more than 1 million vehicles annually," said Wade Newton, a spokesman for the Alliance of Automobile Manufacturers. "This is a tremendous benefit to the U.S. auto and auto parts.

"NAFTA has created a strong regional bloc that supports a healthy and expansive automotive supply chain in the U.S., Canada and Mexico. This regional supply chain enables job creation in the U.S. rather than inhibiting it."

In the same 24-year period, the United States experienced an economic slowdown in the early 2000s and a recession in 2008 and 2009. Mexico went into recession in the early 1990s.

China joined the World Trade Organization and became a manufacturing giant in the early 2000s. Technological advances have led to more automation across industries. These and other developments all had an effect on the decline in U.S. manufacturing.

"In reality, NAFTA did not cause the huge job losses feared by the critics or the large economic gains predicted by supporters," according to the CRS report. "The net overall effect of NAFTA on the U.S. economy appears to have been relatively modest, primarily because trade with Canada and Mexico accounts for a small percentage of U.S. GDP. However, there were worker and firm adjustment costs as the three countries adjusted to more open trade and investment."

Trade with Mexico and Canada was equal to less than 5 percent of U.S. GDP when NAFTA went into effect, the report added, and "two-way trade with Mexico was equal to an even smaller percentage of GDP (1.4%) in 1994."

A separate report by the Congressional Budget Office in 2003 found "it is possible to conclude that NAFTA has increased annual U.S. GDP, but by a very small amount -- probably no more than a few billion dollars, or a few hundredths of a percent."

We asked the White House for data backing up Trump's claim that NAFTA had caused the loss of "thousands of factories and millions of jobs," but we got no response.

Before NAFTA, Mexico had onerous trade barriers for the auto industry. The trade agreement phased out Mexico's tariffs of 20 percent or more for cars and car parts, lifted restrictions on foreign auto production, lifted a ban on importing finished vehicles and eased other restrictions. The country is now one of the prime suppliers and customers for U.S.-made vehicles.

According to the independent Center for Automotive Research, rejiggering NAFTA comes with risks for the auto industry.

Every auto-producing region in the world relies on low-cost labor to be competitive, the group found in an April report, and it's not clear the United States could bring back some of the production functions that have been outsourced to Mexico since 1994.

"Setting a very stringent automobile ROO [domestic production requirement] with the goal of bringing manufacturing back to the United States and the NAFTA region could have the opposite effect if the content targets are set too high, or the rules are too onerous," the CAR report said.

Here's an example of the risks:

"In 2017, Ford Motor Company decided to cancel its planned move of Focus production to Mexico and to source the Focus from an existing plant in China instead. The direct consequence of that decision is that there are fewer U.S. jobs assembling the major components (engines, transmissions) and other parts for the Focus as those parts are primarily sourced in Asia for Chinese production. At the same time, the Michigan plant that currently produces the Focus will be retooled to build the Ford Ranger and later the Bronco. These vehicles will mainly use engines sourced from Ford Engine plants in Cleveland and Lima, Ohio, and transmissions will primarily come from the company's Livonia, Michigan transmission facility.

"Depending on other sourcing information not yet publicly available and the sales volumes for these vehicles, the Michigan plant will likely support more U.S., Canadian, and Mexican jobs than it did when producing the Focus and previous models in that Michigan plant. The product allocation is a net positive for the United States, but the economic impact could have been stronger still had Focus production moved to Mexico instead of China."

Trump is renegotiating NAFTA just as his administration has imposed new tariffs on steel products and considers additional tariffs on cars.

The steel tariffs could cost 40,000 auto jobs, according to the Council on Foreign Relations. The prospective car tariffs were widely criticized by industry representatives at a hearing in July, according to Bloomberg News.

Ann Wilson, senior vice president of government affairs at the Motor and Equipment Manufacturers Association, said at the hearing that "the imposition of tariffs is a risk to our economic security that jeopardizes supplier jobs and investments in the United States."

Finally, although Trump says new auto plants are being built in Michigan, Ohio and Pennsylvania, it's important to keep in mind that some of these investments -- such as Chrysler moving a production line from Mexico to Michigan -- do not involve new plants. (Chrysler has said the Mexican plant will remain open, handling other work, and the Michigan plant already existed.) We couldn't find any evidence of a new car plant being built in Pennsylvania since Trump took office.

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It's clear that millions of manufacturing jobs and thousands of U.S. manufacturing establishments have disappeared since NAFTA took effect in 1994. What's less clear is how much of that is because of NAFTA.

The studies we reviewed indicate NAFTA had a modest effect on the U.S. economy. Auto industry representatives and independent analysts seem to agree the NAFTA dynamics have helped rather than hindered automakers with U.S. operations.

The White House did not provide information backing up Trump's claims as to NAFTA's toll in terms of U.S. jobs or in terms of new car plants being built in Michigan, Ohio and Pennsylvania.

We don't question that U.S. jobs wound up in Mexico as a result of NAFTA. But the president is giving a misleading picture of the treaty's effect on the U.S. auto industry, without offering data to support his case. He earns Three Pinocchios.

Three Pinocchios