Question: Part of the goal of NAFTA (and its successor) was to economically integrate the North American economies. On April 2, President Trump imposed wide-ranging tariffs on just about everything imported into the US. Included are automobiles manufactured in Mexico and Canada. The next day, April 3, Stellantis (who owns Chrysler, Jeep, and other brands) announced they were idling factories in Canada and Mexico, as well as temporarily laying off 900 workers at their Detroit powertrain and stamping plant. Why would tariffs on Mexican and Canadian cars lead to layoffs in American automobile plants?
(The answer is below, dear reader. If you would like to take a shot, stop here and continue on when done).
Answer: The Detroit plant makes parts of the Canadian and Mexican factories. Powertrain and stamping are inputs that are just shipped to Mexico/Canada and assembled there. By increasing the cost of Mexican/Canadian cars, thus reducing the supply, the tariffs have reduced the demand for American-made automobile parts, leading to the layoffs. The tariffs that supposedly were to create jobs for American workers is actually reducing their jobs.
Explanation: Thanks to NAFTA, and globalization in general, North American economies have become more vertically specialized. Consequently, that means that American, Mexican, and Canadian manufacturing plants have become complements to one another, not substitutes. An increase in price of one good reduces the demand for its complement. The reduction in demand, thus, leads to lower demand for workers, leading to the temporary layoffs.
