This compete on a global scale with

This memo discusses recent developments regarding the renegotiation of NAFTA and how it could potentially affect international trade practices of General Motors. General Motors has a strategic vision to become “the world’s most valued automotive company.” It aims to build everlasting relationships with its customers and create significant value for its shareholders. NAFTA has helped the company make huge progress to achieve its goal and compete on a global scale with large automotive manufacturers. NAFTA has also helped GM create numerous jobs in North America and improve the communities we operate in. If, according to recent reports, NAFTA is completely revoked and a border tax is imposed on products manufactured outside the US, GM will not be able to fulfill its mission to become a global leader in the automotive world. This memo will clarify the facts around NAFTA, our mission and our commitment to renegotiating certain policies under the agreement. Overview of GM’s International OperationsAs mentioned above, our mission is to be the world’s most valuable company. General Motors operates internationally under different subsidiaries:General Motors North America (GMNA)General Motors Europe (GME)General Motors International Operations (GMIO)General Motors South America (GMSA)GMNA is the most important subsidiary as it contributes to about 63.4% of our worldwide sales. General Motors also has the largest market share of 17% in North America in terms of vehicle volume sales. We are a huge global company and employ about 225,000 people worldwide. GMNA alone employs 55% of that global workforce (10-K 2016). Given the scale of GMNA’s operation, it is critical to maintain free trade agreements like NAFTA across North America to ensure consistent progress of the company and the community. Criticism of NAFTAOne of the main criticisms of NAFTA is that allowing companies to participate in free trade with the US encourages them to set up new factories in Mexico and employ low-wage Mexican workers, instead of American workers (Gillespie). The Trump administration therefore considers NAFTA a barrier to job creation and has proposed to renegotiate NAFTA to stimulate the US manufacturing industry. Currently, the law states that 62% of the car parts of automobiles sold in North America must be sourced from either the US, Canada or Mexico. However, the Trump administration wants to raise this threshold to 85%. Moreover, they want 50% of the total car parts to be manufactured in the US (Gillespie).A second criticism of NAFTA is that the trade deficit between the US and its North American trading partners, namely Canada and Mexico, has exacerbated as a result of NAFTA. The US government imported $78 billion of cars and auto parts from Mexico, while its overall deficit with Mexico was $58 Billion. President Trump desperately wants to reduce the US deficit and sees this as a good opportunity to reach that goal (Gillespie). According to the Mexican Automotive Industry Association, out of the 2.9 million vehicles manufactured in Mexico, nearly 2 million vehicles were exported to the US (Reuters).President Trump has suggested that he would levy a 35% cross border tax on vehicles imported from Mexico to reduce the trade deficit (Rosevear). Why is NAFTA so important to GM?Despite the recent criticism, NAFTA provides significant benefits and protects GM from several potential risks.Global supply chain: GM is a huge international corporation and relies on a global supply chain to deliver raw materials, auto parts and components, so that it can efficiently manufacture its products. Having restrictions on trade and new or higher tariffs can affect GM’s supply chain and make manufacturing vehicles more expensive in comparison to our global competitors.Industry has excess manufacturing capacity: Due to the cyclical nature of the industry, the  auto companies have higher manufacturing capacity compared to demand. This requires that each of the existing facilities is extremely cost effective so that GM doesn’t have to increase vehicle pricing for its customers. It is extremely difficult to compete with lower cost countries like India and China, especially if they start exporting vehicles on a large scale (10-K 2016).  Manufacturing vehicles in Mexico has significant advantages over manufacturing in the US.Increased Trade with other countries: Mexican exports are exempt from tariff in 44 countries, whereas US exports are exempt from tariff in 20 countries. Exporting products manufactured in Mexico gives GM greater access to markets across more countries and therefore increases  GM’s global presence.Free trade with the US: The United States is an extremely attractive market for autos. With NAFTA allowing free trade with the US, it is extremely easy and cost effective to ship vehicles from Mexican factories to US dealers.Low-Wage Workers: Mexican workers although low-wage, are highly qualified. Mexico graduates over 90,000 engineers and technicians yearly. While American workers are paid $46 hourly, Mexican workers are paid about $8 per hour. Achieving low-cost effectiveness in  operations is essential if GM wants to compete with India and China.Existing infrastructure in Mexico: GM currently has four large factories in Mexico. Other large automakers also have existing factories in the country and this means there is a rich network of suppliers, logistics companies, and other resources that automakers seek. Mexico also has good deep-water ports on both the Atlantic and Pacific Oceans, facilitating longer-distance exports.Setting up new factories in the US is not feasible: Setting up and running new factories in the US requires a huge capital investment. Moreover, the investment becomes profitable only when US factories function at or above 80% capacity. Presently, the US auto-market has reached its zenith, and therefore most American factories are operating above threshold capacity. Since the new-auto market is cyclical, automobile sales are predicted to drop in the next few years. Furthermore, most US factories currently produce high margin-automobiles like luxury cars and SUVs, while Mexican factories mostly produce low margin-automobiles like small sedans. GM’s profit margins will be significantly affected if the company is forced to produce models with low margins in US factories that are operating at low capacity due to a downturn in automobile demand. Since fixed costs of a Mexican factory are significantly lower than US factories, it is more sustainable to operate Mexican factories even in a down market (Rosevear).Therefore, altering or revoking NAFTA will have a debilitating effect on GM’s position as a global leader in the automotive industry.Recommendations and ConclusionIf NAFTA is revoked or tariff is levied on vehicles and/or parts imported from Mexico and Canada, GM might be forced to outsource its operation to China or increase automation in US factories to maintain competitive vehicle prices. Establishing new manufacturing facilities in the US might not be feasible due to aforementioned reasons, and therefore deter GM from investing heavily in the US manufacturing industry. Revoking NAFTA will significantly affect 14 million US jobs that are intimately linked to trade with Mexico and Canada (Gillespie). Therefore, contrary to the US government’s rhetoric, withdrawing from NAFTA would not only discourage job creation but also take existing manufacturing jobs away from US factories.Instead, the Trump administration might consider focusing on one of the root causes underlying the loss of American manufacturing jobs – currency manipulation and unfair trade practices used by certain countries that make foreign cars more affordable in the US, thereby undercutting the competitiveness of US companies (Scott et al 2017). The Trump administration should work with Canada and Mexico and implement strong currency manipulation rules, which will reduce foreign currency risk for the company (Teddy).President Trump has proposed to cut business regulations by 75%. Relaxing regulations such as fuel economy standards would help GM and other US auto-manufacturers to save billions of dollars trying to produce automobiles with a fuel efficiency as high as 54.5 mpg. A report suggests that automakers can save up to $17 billion if fuel economy regulations are relaxed. This can be reinvested to support 200,000 to 400,00 US jobs (Muller).Finally, a more conducive tax environment boosted by lower corporate tax rates would encourage GM to invest into the US manufacturing industry.In conclusion, NAFTA is extremely beneficial not only to GM but also to the United States economy.  Hence, it is critical that  NAFTA is renegotiated to meet present business challenges and not revoked.


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