By the end of this year, the record-breaking U.S. trade deficit in automotive parts is expected to have grown 180% since the most recent upturn in 2001. A number of factors contribute to the rise, including the increase in transplant production (domestic vehicle assembly by foreign automakers). Transplants source from their home countries to a great extent, although they increasingly source from U.S. automotive suppliers. As a result, parts trade now bears the burden of imports that in the past were charged against vehicle imports.

The successful global expansion of multinational companies also is a major contributor to the trade imbalance. Many of the strongest U.S. automotive products manufacturers have had tremendous international success. A report from the McKinsey Global Institute, “Perspective: A New Look at the U.S. Current Account Deficit: The Role of Multinational Companies,” notes that “foreign subsidiaries account for nearly 25 percent of the profits of U.S. multinational corporations and add roughly $2.7 trillion in market capitalization for their parent companies.”

Another contributor to the U.S. trade deficit in automotive parts is the growing trade with China. Developing countries provide the greatest opportunity for growth in the automotive industry. As one of the world’s fastest-growing economies, China is a growing market with a vast population on its way to becoming a very large pool of consumers. However, along with all that economic growth, China has a low-cost labor force and a well-developed supplier base. Parts production increased outsourcing to offshore suppliers such as China is evidenced in the growth of imports of automotive parts from developing countries.

Automakers in Mexico vs. Canada

Our two closest neighbors are also our two greatest trading partners, at least in the automotive sector. Canada and Mexico account for a combined 39% of our total deficit in motor vehicles and parts, and more than 78% of the total exports of U.S. automotive parts.

In 2004, the United States imported $46.5 billion in vehicles assembled in Canada, and imports of Mexican vehicles were valued at slightly more than $19 billion. Many of the parts for, and much of the value of, these vehicles comes from the $41.2 billion in components exported from the United States to Mexico and Canada.

From a parts trade perspective, the difference between the two countries is that Canada imports considerably greater value (165%) of automotive parts than Mexico. Despite the $20 billion in parts imports from Canada, the United States has a positive balance of trade with Canada.

In recent testimony before the Senate budget committee Alan Greenspan (Federal Reserve chair) said that China’s enormous manipulation of its exchange-rate was causing growing imbalances in its own economy, and that it will force China to abandon its currency peg.

Charles Schumer, a Democrat from New York, proposed a bill that would impose a 27.5% tariff on all goods from China unless their government adjusted its currency within six months -- a vote is expected by July.

Our two closest neighbors are also our two greatest trading partners, at least in the automotive sector. Canada and Mexico account for a combined 39% of our total deficit in motor vehicles and parts, and more than 78% of the total exports of U.S. automotive parts.

In 2004, the United States imported $46.5 billion in vehicles assembled in Canada, and imports of Mexican vehicles were valued at slightly more than $19 billion. Many of the parts for, and much of the value of, these vehicles comes from the $41.2 billion in components exported from the United States to Mexico and Canada.

From a parts trade perspective, the difference between the two countries is that Canada imports considerably greater value (165%) of automotive parts than Mexico. Despite the $20 billion in parts imports from Canada, the United States has a positive balance of trade with Canada.

In recent testimony before the Senate budget committee Alan Greenspan (Federal Reserve chair) said that China’s enormous manipulation of its exchange-rate was causing growing imbalances in its own economy, and that it will force China to abandon its currency peg.

Charles Schumer, a Democrat from New York, proposed a bill that would impose a 27.5% tariff on all goods from China unless their government adjusted its currency within six months -- a vote is expected by July.