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

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 wire 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 wire 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 only has to pay duties on the value that was added to the part while it was in Mexico. But CEO Brad Kraft says he's concerned that the tariffs proposed by the White House could impose a tariff 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 last few decades, the system has dispersed geographically. That included wire bundling jobs once done in the U.S. shifting 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 U.S. 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. [Copyright 2019 NPR]