The North American Free Trade Agreement and new location patterns of the automobile industry

The free trade agreement between the United States, Canada, and Mexico presents an unprecedented market prospect for the automobile industry. It can now rationalize the manufacturing operations and achieve better economies of scale by consolidating inefficient Mexican assembly activities with those of the U.S. and Canada. An interesting component of this restructuring is the potential division of labor, in which small cars are produced in Mexico. This study aims to check the feasibility of this arrangement by providing possible scenarios for the future production patterns under different circumstances. First, a comprehensive assessment of the past and current state of the automobile industry in North America is provided. Locational factors of vehicle assemblers are examined in detail. To better understand the attitude of the supplier community toward Mexican operations, a postal survey of U.S. parts manufacturers is also conducted. The findings indicate that, although the suppliers are attracted to the cheap labor force south of the border, they are reluctant to make a move unless assemblers do so first. Secondly, the study investigates the possible impact of NAFTA on the automobile production patterns by constructing a multi-region monopolistic competition model that is comprised of three types of vehicle assemblers and two classes of vertically-linked parts suppliers. By calculating potential profits in each region, this partial equilibrium model explains the past propagation patterns of various assembly operations in North America. In a similar fashion, the model allows us to identify the types of automobile that will most likely be produced on Mexican soil as a result of reduced tariffs and non-tariff barriers. The simulation results indicate that, as the trade barriers go down, producers of small cars will find it most desirable to operate in Mexico, while large-car manufacturers would be constrained in the U.S