After many months of aggressive negotiations, including quite a bit of bluster about dumping Canada from a new version of NAFTA, President Trump’s trilateral trade deal could be good news for Michigan and in particular for the Detroit-based domestic auto industry.
The tentative North American pact, announced earlier this week, features requirements that could decrease outsourcing of auto parts manufacturing to Asia and force Mexican manufacturers to gradually reverse the low-income wages paid to their autoworkers.
While experts are still poring over the 1,200-page proposal, General Motors and Ford have applauded the accord and the business community overall seems relieved by the details of the newly labeled USMCA – the United States-Mexican-Canadian Agreement. The changes to the 25-year-old NAFTA are relatively minimal, making some minor concessions to Mexico and Canada while giving the U.S. the upper hand.
The agriculture industry, which would largely maintain the status quo, especially breathed a sigh of relief as Michigan and 32 other states count Canada as their leading destination for exports (see map below). Beyond autos and auto parts, the $1.2 trillion worth of annual trade among the three nations is mostly dominated by food products and a variety of crops.
While Trump focuses on images and symbols in promoting the pact, the meat of the plan includes some long-sought provisions by the domestic auto industry and the United Auto Workers union. These elements recognize the auto industry’s complex, integrated supply chain with connections throughout the U.S., Canada and Mexico, while also recognizing the economic impact of Chinese imports.
For each vehicle built, the content – parts and components – would be increasingly supplied by North American manufacturers. The content requirement, currently at 62.5%, increases to 66% on Jan. 1, 2020, and then goes up in annual increments to 69% and 72% before hitting 75% in 2023. New rules would also demand that 70% of the steel and aluminum used by auto producers comes from North America
In addition, starting in 2020, cars and trucks must have at least 30 percent of the work on each vehicle done by workers earning $16 an hour. That gradually moves up to 40 percent for cars by 2023.
That is a boon for those Mexican autoworkers who currently earn only a fraction of that amount while U.S. and Canadian workers are paid close to $30 an hour.
Clearly, the trade agreement would slash financial incentives for auto companies to build in Mexico and export to the U.S. Industry analysts say that could be a big issue for Volkswagen, but it could also affect business decisions by Nissan and Hyundai, to the benefit of American workers. What’s more, China’s auto parts exports to Mexico will probably be curtailed.
At the same time, industry analysts say decisions by the three U.S. domestic automakers could have a detrimental impact on American workers and consumers.
Car prices will likely rise while jobs returning to the U.S. from Mexico and Canada will probably be minimal.
According to the Los Angeles Times, most of the major automakers, foreign and domestic, should be able to meet the higher rules of origin with a bit of mixing and shifting where they now assemble cars and trucks, engines, transmissions and other parts. But the small-car import market could take a hit.
“There may be some vehicles that just aren’t sold in the U.S. market anymore because it’s not cost-effective to either pay the tariff or re-source the supply chain,” said Kristin Dziczek, a vice president at the highly regarded Center for Automotive Research in Ann Arbor.
The tariff Dziczek refers to is a 2.5% tax on imported vehicles that don’t comply with all the trade rules in North America.
For example, —PRI—-let’s say a Ford built in Mexico doesn’t meet those thresholds. The Dearborn-based automaker would have to pay the tariff/tax. Dziczek has said that the auto company would probably opt to pay it rather than establish new production sites.
“It is much cheaper to pay 2.5 percent than it is to invest in new plants, expand capacity,” he said. “To do all the things you would need to do to jump through these hoops is in many cases more costly than paying 2.5 percent.”
But all those incremental costs would add up, and Dziczek estimates that some American-brand vehicles built in Mexico and Canada could carry sticker prices of $470 to $2,200 more.