This article is the third offering in a series examining Arizona’s position vis-à-vis the Mexican automotive industry and its relevance for Arizona’s economy. "Arizona and North America's Auto Alley," first in the series, highlighted Arizona's integration into the North American auto production system and the importance of the automotive industrial complex which has developed around the Ford Motor Co. in Sonora to the state's economy. This despite Arizona's location outside the major concentration of car assembly plants known as the North American “auto alley.” Next, "Arizona's Trade with Mexico in Automotive Products: How Does Arizona Differ from the Nation?" describes how geography partially accounts for relatively lower shares of automotive products in Arizona’s trade with Mexico when compared to the national average. However, during last few years, Arizona’s exports of auto parts to Mexico experienced faster growth than the nation (and indeed than other export sectors and Arizona's economy as a whole). At a time when uncertainties linger over the NAFTA framework and policy makers are considering possibly drastic changes to current trade patterns with Mexico, it is difficult to interpret whether “more” or “less” trade and economic integration (in comparison to the nation’s average) is better or worse for the state’s economy. The same conclusion is probable when we take a closer look at Arizona’s border ports of entry (BPOE) and their role in the U.S. - Mexico automotive trade.
Why Border Ports Matter
Arizona’s BPOE are an important channel through which the U.S. trades with Mexico. As illustrated in "Arizona Ports Matter: Are Vital Link to Trade with Mexico," in 2015 all fifty U.S. states and the District of Columbia exported goods to Mexico through Arizona’s BPOE. Among the top users is the state of Michigan, reflecting Detroit’s association with the automotive industry in Sonora.
Before we dig into statistical data and economic indicators specific to trade in automotive products, let’s briefly review why it matters for Arizona to have ports that facilitate trade between Mexico and other U.S. states, including exports and imports from Canada’s provinces to and from Mexico. The economic importance of well-equipped, efficient, and ever growing BPOE is commonly considered a vital asset in a region’s or state’s economic development, although this may not be obvious to an casual observer. The latter may be primarily concerned with increased traffic, heavier wear and tear on Arizona’s highways, and increased congestion at the ports of entry - all of which are valid concerns that require constant monitoring and necessary improvements. But, the flow of commodities to and across the border requires a vast system of direct services from brokerage, to inspection, to transportation, as well as an array of services in support of both port employees and infrastructure maintenance.
For example, more than 40% of employment in Arizona’s largest port, Nogales, depends directly and indirectly on the facilitation of trade with Mexico.1 In comparison, Arizona’s Phoenix and Tucson metro areas benefit more from direct exports, but because of their proximity to the border, and Nogales in particular, both metro areas attract companies with production and/or distribution facilities involved in trade with Mexico. Thus, in a nutshell, while we usually think of BPOEs as points of contact at an international line, the impacts of their economic activities are felt far and wide.
While geography plays a significant role in explaining the volume and composition of commodities shipped through a particular port, a host of other factors such as physical access, inspection facilities, staffing, hours of operation, wait times, as well as cooperation with the Mexican side of the border, contribute to the port’s growth and competitiveness vis-a-vis other BPOE.
Automotive and Automotive–Related Commodities in U.S. - Mexico Trade
Following the approach applied in the two preceding articles, the focus of this analysis is on automotive trade, which encompasses exports and imports of motor vehicle manufacturing, motor vehicle body and trailer manufacturing, and motor vehicle parts manufacturing. In the North American Industrial Classification System (NAICS), this corresponds to industries 3361, 3362, and 3363, respectively. However, a large range of products that are used in modern cars are supplied by industries that at first glance may not have any direct connection with cars or trucks. About 15,000 parts and components that go into vehicle manufacturing come from industry sectors such as computer and electronic products manufacturing (334), electrical equipment manufacturing (335), plastic and rubber product manufacturing (326), fabricated metal product manufacturing (332), and machinery manufacturing (333).2 In fact, industry analysts point out that today electronic components account for 40% of the modern automobile. As yet more sophisticated cars are developed, this share is expected to grow.3 Figure 1 shows the industries that supply primary parts and components (subsectors of NAICS 336) and industries that supply additional parts and components, and are thus labeled as partially automotive-related (NAICS 326, and 332 through 335).
Figure 1. Main Industry Suppliers of Parts and Components (NAICS designation)
In 2016, the U.S. exported $26.4 billion worth of automotive products to Mexico via southern BPOE, or 13.6% of the total value of exported commodities, and another $93.3 billion, or 48.2%, worth of manufacturing products that were identified as automotive-related, although the exact amount actually used in auto assembly is not known. Together these two categories accounted for 61.8% of the total value of commodities exported to Mexico via southern BPOE (Figure 2a).
As assembled cars and trucks cross the border into the U.S., the dollar value and percent share of automotive products increases in total imports from Mexico. In 2016, automotive products were worth $88.9 billion and accounted for 33.9% of all imports from Mexico to the U.S. via southern BPOE (Figure 2b).
Figure 2. Southern BPOE: U.S. Exports to Mexico (a, left), and U.S. Imports from Mexico (b, right)
Source: AZMEX based on USA Trade Online4
The share of the other five industries that were earlier identified as automotive-related manufacturing remains relatively high in U.S. imports from Mexico, about 41.8% in 2016, albeit below their share in exports. A considerable volume of imported products manufactured by maquiladoras in Mexico - computer/electronic products, electrical equipment, fabricated metal products, plastic & rubber products, and machinery - are destined for U.S. - based car assembly plants as well as for other U.S. and Canadian industries.
The fact that the composition of exports and imports between the U.S. and Mexico is very similar in terms of industry classification reflects a high degree of integration in manufacturing production within and among NAFTA partners. While automotive manufacturing is North America’s most prominent shared industry, advanced manufacturing in many U.S. states greatly depends on intermediate imports from both Mexico and Canada.
Arizona Border Ports of Entry - A Higher-than-Average Share of Automotive Products in Cross-Border Trade
Of the $11.9 billion worth of exports travelling to Mexico through Arizona’s BPOE in 2016, $1.4 billion or 11.9% were automotive products. An additional $5.4 billion, or 45.3% were products that were partially associated with car assembly. Together, automotive and other automotive-related products accounted for 57.2% of the dollar value of exports to Mexico via Arizona’s BPOE, which is less than the average composition of all southern BPOE where these two categories accounted for 61.8%. (Figure 3a).
Figure 3. Arizona’s BPOE: U.S. Exports to Mexico (a, left), and U.S. Imports from Mexico (b, right)
Source: AZMEX based on USA Trade Online4
Arizona's BPOE import composition, however, differs from the average of southern BPOE. First, the share of automotive products (mostly assembled cars) was higher in Arizona’s BPOE import composition than the average for all southern BPOE. The dollar value of imported automotive products of $6.6 billion accounted for 35.8% of the total imported value from Mexico through Arizona’s BPOE. Second, the share of other automotive-related products is substantially lower in the case of Arizona’s BPOE, about 23.0% compared to 41.8% for the average of all southern BPOE. The latter suggests that (a) a substantial portion of U.S. exported parts and components shipped via Arizona BPOE are being integrated into finished cars, and (b) other parts and components that are produced in Mexico’s maquiladoras as inputs into U.S. car assembly use other BPOE more often than Arizona’s most likely because of geography, i.e., proximity to the “auto alley”.
Nearly Seven Out of Every One Hundred Dollars of U.S. - Mexico Trade Travels Through Arizona
Arizona’s BPOE accounted for 6.6% of all trade between the U.S. and Mexico via southern BPOE in 2016. This applies to the value of all commodities. In automotive trade, Arizona’s BPOE share is higher, at 6.9%. The total value of trade (exports and imports) in automotive products between the U.S. and Mexico channeled through Arizona BPOE reached $8.0 billion in 2016, a 35.9% increase from 2008. In spite of the higher dollar value of trade, especially since 2013, Arizona’s BPOE have lost some of their relative share in comparison with all southern BPOE (Figure 4).
Figure 4. U.S. - Mexico Automotive Trade via Arizona BPOE
Source: AZMEX based on USA Trade Online5
In a recent blog, Joseph Parilla of the Brookings Institution stated that “for companies, cities, and states reliant on North American trade, the stakes of a NAFTA renegotiation are potentially high”.6 In the absence of a crystal ball, we have offered basic facts about Arizona’s economy and its BPOE’s share of the U.S. - Mexico automotive trade and provided a glimpse of economic activity vulnerable to any drastic disturbances, such as “border tax.” A key point is the realization that if a “border tax” specifically targets the import of automotive products, Arizona’s BPOE are going to be impacted relatively more than other southern BPOE based on the above-average share of those products in the overall import composition of Arizona’s ports.
1. Pavlakovich-Kochi, V., & Thompson, G. D. (2013). Fresh Produce and Production Sharing: Foundations and Opportunities for Nogales and Santa Cruz County.
3. Klier, T. and Rubenstein, J. (2011), Making cars smarter: The growing role of electronics in automobiles, Chicago Fed Letter.
4. Automotive sectors include motor vehicles (NAICS 3361), motor vehicle bodies & trailers (NAICS 3362), and Motor vehicle parts (NAICS 3363). Other auto-related includes Computer/electronics (NAICS 334), Electrical equipment (NAICS 335), Plastic & rubber (NAICS 326), Fabricated metal (NAICS 332), and machinery (NAICS 333). Southern BPOE are here defined as the following districts: San Diego, Nogales, El Paso, and Laredo.
6. Parilla, J. (2017) How U.S. States rely on the NAFTA supply chain, The Brookings Institute.
Photo of vehicle interior courtesy of Shutterstock.