VW plant, Chattanooga may benefit by NAFTA deal, economist says

VW plant, Chattanooga may benefit by NAFTA deal, economist says

August 29th, 2018 by Mike Pare in Business

Staff file photo by Erin O. Smith / Vehicles move down the assembly line at the Volkswagen plant in Chattanooga. The company employs about 3,500 people in the city.

Photo by Erin O. Smith

“Our auto assembly base is dependent on northsouth trade.”
University of Tennessee economist Dr. Matt Murray

Chattanooga's Volkswagen plant and the region could gain from a tentative trade deal with Mexico by attracting more supplier part production, a University of Tennessee economist says.

"If you raise production costs in Mexico and move input production to the Chattanooga area and reduce transportation costs, that would be an advantage," said Dr. Matt Murray, assistant director of the Boyd Center for Business and Economic Research at UT.

But, he said, car prices overall in the United States could go up to cover the costs of higher wages and more North American content.

"That may reduce the autos purchased by consumers across North America," Murray said. "That result plays against Tennessee."

Earlier this week, President Donald Trump announced updates to the North American Free Trade Agreement provisions related to the digital economy, automobiles, agriculture and labor unions. But the core of the trade pact that allows American companies to operate in Mexico and Canada without tariffs remains intact.

The deal between the U.S. and Mexico would require 75 percent of auto content to be made in the NAFTA region, up from the current level of 62.5 percent. Also, the agreement improves labor provisions in part by requiring 40 percent to 45 percent of auto content to be made by workers earning at least $16 per hour.

For Volkswagen, the stakes are high as the German automaker has an assembly plant in Puebla, Mexico, which is its largest worldwide outside of its home base of Wolfsburg, Germany. The car maker produces engines in Puebla and VW is serviced by a vast network of suppliers there. Many of those companies also make parts for the Chattanooga-made Atlas SUV and the Passat midsize sedan.

Higher production costs in Mexico could convince some supplier companies to open plants closer to Chattanooga.

Volkswagen Group of America, in a statement, said the preliminary agreement on a revision of NAFTA in principle is welcomed.

"However, the specific content is in many respects still unclear," the statement said. "Details of the outcome of previous negotiations have not yet been disclosed. Once that is the case, we will be conducting a very careful examination."

Antonio Pinto, chief executive of VW's Chattanooga operations, said earlier this summer that normal trade between the U.S. and Mexico is a must.

"We want to keep our employment here," he said about the factory that has about 3,500 people making the Atlas SUVs and Passat sedan.

Murray said that Tennessee is a top 10 auto assembly state with three production plants and an array of suppliers.

"Our auto assembly base is dependent on north-south trade," the UT economist said.

For all Tennessee business, Murray said the new agreement appears "neutral" for the state.

"There's considerable uncertainty in how it plays out," he said, adding a multilateral agreement is Canada is needed. Canada has rejoined trade negotiations in an effort to reach a deal on NAFTA ahead of Trump's Friday deadline.

Murray said ending a potential trade war between the nations is "a big deal."

Concerning Europe, Trump agreed during a meeting with European Commission President Jean-Claude Juncker in July to refrain from imposing tariffs on European cars while the two sides negotiate to cut other tariffs.

U.S. Sen. Lamar Alexander (R-Tenn.) said Wednesday that Trump's "stated trade goal last month of 'zero tariffs, zero non-tariff barriers, and zero subsidies' is exactly the right goal for Tennessee autoworkers."

He said the Senate Committee on Health, Education, Labor and Pensions, which he chairs, will hold a hearing on the impact of zero tariffs on U.S. automakers next Wednesday.

Contact Mike Pare at mpare@timesfreepress.com or 423-757-6318. Follow him on Twitter @MikePareTFP.


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