Here Comes the U.S.-Mexico Trade Agreement

28 August 2018 Dashboard Insights Blog
Author(s): Jeffrey A. Soble

The North American Free Trade Agreement – NAFTA for short – just took one step closer to no longer existing. As originally reported by the NY Times, the United States and Mexico announced that they had reached agreement on some key provisions that would change from the 24-year-old NAFTA.  Details are scarce, apparently in part because negotiations with Canada continue.  The reported details include:

  • At least 75% of a light vehicle’s value must be manufactured in North America (up from 62.5%) to qualify for zero tariffs.
  • Automakers will be required to use more local steel, aluminum, and auto parts.
  • A certain portion of the vehicle will be required to be made by workers earning at least $16/hour.

Some things under the preliminary deal do not change.  For example, the tariff on automakers who do not comply with the rule will still be 2.5%.  Other issues are still open for discussion, including the “sunset clause”.  The United States wants this agreement to expire automatically while Mexico wants the agreement to last longer and not automatically expire.  The sunset clause is a real sticking point because companies tend to like certainty.  If they do not know what the trade rules will be in five years, it makes long term planning difficult.  This is especially true of planning long term capital investments.

In other words, this deal is not quite done.  Also, while automotive issues are addressed, other industries affected by the trade negotiations have not been addressed.  So, we still have a ways to go before we start analyzing a full U.S.-Mexico Trade Agreement.

Not to mention … Canada?  Yes, the Canadians are not quite on board yet with this deal.  In fact, the Canadians were not even part of the talks held in recent weeks in Washington, D.C.  However, President Enrique Peña Nieto of Mexico stated that “It is our wish, Mr. President, that now Canada will also be able to be incorporated in all of this.”  While the devil is in the details, Canada should appreciate the minimum $16/hour in wages – a provision clearly meant to placate Canada and the United States and compel automakers in Mexico to raise wages, or shift production North.  Not to mention … Congress?  Yes, Congress needs to approve the trade deal.  Including the “Free Trade” block of those in Congress (including Republican lawmakers) who have been critical of changes to NAFTA from the get go.  Not to mention … Mexico?  Yes, Mexico.  President Peña Nieto’s term in office ends November 30, 2018.  So, while promising, hurdles remain.

This appears to be progress, but it is difficult to determine how much progress.  As discussed here on the Dashboard, lots of things impact the vehicles we buy, especially the price.  Tariffs will generally continue to threaten the industry.  Section 232 tariffs will continue to threaten the industry (and, their potential exclusions).  If the price of steel and aluminum is going to increase, and the price of labor is going to increase, it is not difficult to identify where those costs are going to be absorbed – in the sales price.  Profit margins on vehicles, especially light vehicles, are already thin at the OEM level and razor thin at the supplier level with every descending tier.  Also, note that this new deal does not require any new manufacturing in the United States.  It requires a higher percentage in North America and higher wages generally.  This manufacturing can go to Canada (if it joins the deal) or go to Mexico and still qualify for no tariffs.  While these reported provisions should make the United States more competitive, the final agreement will have to be scrutinized to determine the overall potential impact.  And, if the final agreement is truly the U.S.-Mexico Trade Agreement, with no Canada, the impact of losing Canada will surely not be neutral on the Automotive industry, or other industries.

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