Will Changes to NAFTA policy backfire in terms of incentives?
http://www.politico.com/agenda/story/2017/10/13/nafta-auto-rules-of-origin-china-000549
Politico editorial board makes the argument that if President Trump increases the number of cars required to be produced in the US, this will backfire at the end and force automakers to produce overseas. The current trade policy reforms that the Trump administration is considering to change is centered around “rules of origin”, which is the requirement that certain percentage of cars must be produced in North America, and specifically the United States. While President Trump’s goal is to increase domestic manufacturing and production, his policy of increasing the percentage of rule of origin will backfire at the end. This is because forcing domestic production will either increase prices or have companies pay the trade tariff and produce more cars outside the country.
This balance is clearly a network exchange model, where some automakers can either choose to exchange with the United States (for domestic production) or with some other country (for foreign production). Currently, the trade tariffs decrease the outside options and values for automakers wishing to enter the US auto industry, which increases the exchange value between the automaker and the United States. However, if Trump administration increase the “rule of origin” percentage (increasing the domestic production for automakers), then inherently this increases the cost of production. Therefore, now, the exchange value between the automaker and the United States has gone down, increasing the likelihood for the automaker to find an outside option (a foreign country) by paying the trade tariff (which will affect the outside option, but due to the decreased value of exchanging with the United States, it seems much less). This will affect manufacturing and material sources, which will incentivize automakers to find sources of materials (steel, rubber) outside of the United States. This all comes down to the fact that the United States is in competition with other countries of production, and the network exchange values among the nodes determine whether the automaker will stay in the United States, or move overseas.