Meet the New NAFTA, Same as the Old NAFTA

09 October 2018 Dashboard Insights Blog
Author(s): Jeffrey A. Soble

After all the gloom and doom and worry, the United States, Canada and Mexico tweaked the North American Free Trade Agreement. Most importantly (apparently), they changed the name.  Banished is NAFTA.  In its place is the United States-Mexico-Canada Agreement (USMCA). USMCA might be a bit more cumbersome to say, but that might be the largest difference. Canada was convinced to join in after issues associated with the dairy market were worked out.

But, this is an automotive blog. So, let’s focus there. The impact on the automotive industry appears mostly to be that workers will get paid a little more and vehicles will cost a little more.

Key provisions negotiated between the United States and Mexico survived:

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

These provisions mostly work to support (1) workers in all three countries by requiring more value to be derived from North America and (2) workers in Canada and the United States from lower wage workers in Mexico. Thus, it is not shocking to see Canada sign on to these provisions. Importantly, “In a concession to Mexican and Canadian business, the deal largely exempts passenger vehicles, pickup trucks and auto parts from possible Trump administration tariffs.”

USMCA will stay intact for 16 years. At that point, all three countries must agree to extend it. This was a compromise between the United States’ desire for a five year agreement and everyone else’s (including most businesses) to have a longer period of time during which they could rely on the rules of trade in North America. There are also provisions meant to deter countries from manipulating currencies. A relatively meaningless provision for the United States, Canada and Mexico since they have free floating exchange rates. Dispute resolution is largely unchanged, though, rebranded so that they can be called “new”.

So, where does that leave the auto industry? Well, a couple quick calculations will have to be done. First, if I build my plant in Canada and pay higher wages, and use more value manufactured in North America, will that increase the costs per vehicle more or less than 2.5% (the tariff that I have to pay). Because, if it is more, then why not just build my vehicle in Japan, Korea, Vietnam, Singapore, etc.? Second, if the costs of my vehicle go up, who will absorb that cost?  OEM’s? Suppliers? Oh wait, consumers. Yes, expect vehicles to increase in price.

Was it all worth it? A year or so of uncertainty. Sky is falling predictions. At the end of the day, some workers will get better pay, the North American supply chain may need to be tweaked, and some consumers will pay a little more for cars.  Thus, the $30,000 vehicle now costs $30,750. Earth shattering this is not. As put by one headline, “Auto industry relieved by NAFTA 2.0, but results may be mixed.”

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