Ohio To Juárez And Back Again: Why Tariffs On Mexico Alarm The Auto Industry

Jun 5, 2019
Originally published on June 6, 2019 9:38 am

President Trump has threatened to impose tariffs on goods imported from Mexico, starting next week, if Mexico doesn't take action to reduce the flood of Central American migrants across the Southern border of the U.S.

The proposed tariffs — which would start at 5% on goods crossing the border and could ramp up to 25% over time — would play havoc with supply chains in the auto industry.

To understand why, consider a vehicle's wiring harness — the car's nervous system, consisting of a complex network of wires that connect electronic components throughout the car body.

"It's a huge, heavy bundle of wires and it's gotten dramatically more complicated as cars become more electronic," says Sue Helper, an economist at Case Western Reserve University. "If they're done wrong, you can get electrical problems that you'll never solve."

All those wires are carefully laid out in the proper configuration (different for different car models) and bundled together before they're installed in a vehicle. And for cars made in the U.S., that bundling almost always happens in Mexico — specifically, in Juárez. It's time-intensive work, and labor is cheaper in Mexico.

But that's just part of the picture.

The terminals on the ends of those wires might be built at an Aptiv factory in Warren, Ohio, shipped to Juárez for assembly into the wiring harness, and then shipped back to the U.S. to be installed in a car.

Smaller, stand-alone parts have their own wiring harnesses. For instance, a breakaway kit designed to stop a runaway trailer starts as a plastic box made by Hopkins Manufacturing Corp., in Emporia, Kan. Then it gets shipped to Juárez, where other components are combined and a wiring harness installed. Finally, the finished good comes back to the U.S. to go inside a trailer or to get sold to a consumer.

These goods start and finish in the U.S. but would be subject to tariffs under the new policy.

And it's not clear just how hard those tariffs would hit.

Hopkins, the company manufacturing breakaway kits and other auto parts and accessories, currently has to pay duties only on the value that was added to the part while it was in Mexico. But CEO Brad Kraft says he is concerned that the tariffs proposed by the White House could be imposed on the total value of the good — which can be 10 times higher than the added value — every time it crosses the border.

If that's how the tariffs are imposed, then when Hopkins Manufacturing brings a breakaway kit back into the U.S., the company would effectively be paying a tariff on the plastic box that it manufactured in Kansas.

The auto supply chain didn't always involve so many parts crossing borders so many times. But over the past few decades, the system has dispersed geographically. That included wire bundling jobs once done in the U.S. being shifted to Mexico.

The supply chain could shift again in the future. But experts say these particular tariffs aren't likely to bring any jobs back to the U.S. Instead, experts worry they could push assembly work from Mexico to other countries with low labor costs, which could actually lead to the loss of more American jobs.

"The wire that goes into those wire harnesses, the fabric that is coated around those wires, as well as all of the connectors are oftentimes made in the United States," says Ann Wilson, the senior vice president of government affairs at the Motor & Equipment Manufacturers Association. "So if we make it more expensive to make wire harnesses in Mexico ... and they move that offshore someplace else, we are going to lose those jobs in the United States."

That might be a concern in the long term. For now, businesses aren't ready to make drastic decisions like moving factories, given the profound uncertainty surrounding these tariffs.

In addition to the fluctuating amount — 5%, gradually rising to 25% — it's not clear how long the tariffs might be in place; they're pegged to progress on immigration, as defined by the administration's "sole discretion and judgment."

"What do we have to achieve in the immigration issue before suddenly the tariffs are now taken away?" asks Aaron Lowe, senior vice president for regulatory and government affairs for the Auto Care Association, which represents companies that provide aftermarket auto parts and services. "It's very, very vague."

Frontera Radiators and Parts, based in El Paso, Texas, right on the border, operates multiple manufacturing facilities in Mexico. It makes truck radiators that are no longer produced in the United States. CEO Arnoldo Ventura is considering buying products from competitors in India or Dubai, if the tariffs do make it up to 25%. But planning is difficult.

"Instead of looking forward a year or two years of planning, we're just planning on every week," Ventura says.

And Kraft of Hopkins Manufacturing says in this atmosphere of uncertainty, he can't just pick up and move his factory from Juárez.

"There's very little that we can do," he says.

There's only one thing, really. Prepare to pay the tariff — and pass the higher costs along to consumers.

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ARI SHAPIRO, HOST:

Vice President Mike Pence met with Mexican officials today in Washington. He wants to pressure Mexico to slow the flood of Central American migrants headed to the U.S. border. President Trump says starting Monday, the U.S. will put tariffs on all Mexican goods coming into the country if Mexico doesn't do more to stop migration. If the tariffs are imposed, it would play havoc with supply chains of many U.S. companies. NPR's Camila Domonoske looks at the auto industry.

CAMILA DOMONOSKE, BYLINE: You have a nervous system. Your car has a complex network of wires tied together into something called a wire harness. It connects electronics throughout a vehicle.

SUE HELPER: So it's a huge, heavy bundle of wires, and it's gotten dramatically more complicated as cars become more electronic.

DOMONOSKE: Sue Helper is a case Western Reserve University economist. Every car has a different configuration for its wires.

HELPER: If they're done wrong, you can get electrical problems that you'll never solve (laughter).

DOMONOSKE: So before those wires go in the car, you bundle them together. And for U.S.-made cars, that bundling almost always happens in Mexico, specifically in Juarez.

HELPER: Wiring harness capital of the world.

DOMONOSKE: It takes a lot of human hours to do this work, and labor is cheaper in Mexico. But the bundling of wires together is just one step in a long process. At a plant in Warren, Ohio, workers stamp out metal parts that will connect wiring to just about every electronic thing in a car.

HELPER: And these presses go so fast that you can't really see them. It's amazing how quickly they move.

DOMONOSKE: Those parts go to Mexico, get attached to wires, and the wires get bundled together and then come back the U.S. to go in a car. Smaller parts can have their own wiring harnesses, too. Brad Kraft is the CEO of Hopkins Manufacturing Corporation, which, among other things, makes parts for trailers, like a device to stop a runaway trailer if it breaks off. It starts off simply in Emporia, Kan.

BRAD KRAFT: We manufacture the plastic box in Kansas, bring it down into our manufacturing facility in Mexico.

DOMONOSKE: There in Juarez, his company will add other components and of course bundle together the wires.

KRAFT: And bring it back into the U.S. as a complete, finished good.

DOMONOSKE: Ready to be installed in a trailer or sold at auto parts stores. This happens all the time and not just with wiring. The process of building a seat might send the same part back and forth across the border multiple times, which would mean multiple tariffs even if a car is assembled in America and even on parts that started out in America.

The supply chain didn't always work like this. Sue Helper says that decades ago, a lot of work like this would have been done close together in the U.S. And the process could shift in the future, but experts say these tariffs are not likely to bring those wire bundling jobs back to the U.S. Instead they might push them overseas to other places with low labor costs. Ann Wilson is with the Motor & Equipment Manufacturers Association.

ANN WILSON: Keep in mind the wire that goes into those wire harnesses, the fabric that is coated around those wires as well as all of the connectors are oftentimes made in the United States. So if we make it more expensive to make wire harnesses in Mexico and they move that offshore someplace else, we are going to lose those jobs in the United States.

DOMONOSKE: That's probably a long-term concern. In the short term, Brad Kraft says he can't just pick up and move his factory from Juarez. He's only got a week of warning and no way of knowing how long these tariffs would last.

KRAFT: So there's very little that we can do.

DOMONOSKE: Just one thing, really - prepare to pay the tariff and raise prices as a result, a change which would be felt by U.S. consumers. Camila Domonoske, NPR News. Transcript provided by NPR, Copyright NPR.