Negotiators from the U.S. focused much of their effort in reworking the North American Free Trade Agreement on provisions affecting auto manufacturing, touting the final deal with Canada and Mexico as a boon to domestic carmakers and their employees.
“Once approved, this will be a new dawn for the American auto industry and for the American autoworker,” President Trump declared in announcing the accord on Monday. His chief trade negotiator, Robert Lighthizer, singled out the new auto rules, saying they are “really going to bring back jobs to America.”
But as innovative and substantial as the changes are, experts said the amendments in the new U.S.-Mexico-Canada Agreement — specifically a new minimum-wage requirement for some workers and an increase in the North American-produced content of vehicles necessary for tariff-free trade — will provide only a limited increase in U.S. production and employment in the foreseeable future. About 952,000 U.S. workers are employed in manufacturing automobiles and parts.
Most of the major automakers, both domestic and foreign, will 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.
That will be harder to do for a few automakers like Volkswagen, which has put much of its investments in Mexico, where wages are much lower. And new rules that auto producers must source 70% of steel and aluminum from North America will force Hyundai to rethink its current practice of importing steel from South Korea.
Even then, the new auto rules won’t fully take effect until 2023, allowing companies to gradually make adjustments.
“When we look at that phase-in period, it’s something that doesn’t necessarily scream out that we’re going to see a massive increase in U.S. assembly or parts,” said Jeff Schuster, president of global vehicle forecasting at research firm LMC Automotive. “On the surface, this isn’t something that’s going to cause a massive shift, in our opinion, to the U.S. I think it will be more of a subtle shift.”
Automakers and experts are poring over the details in the 1,168-page text, released after an eleventh-hour agreement with Canada late Sunday allowed the negotiations to meet a U.S.-imposed deadline. U.S. officials were in contact with automakers as they negotiated the deal and the early reaction from the industry has been positive.
“These changes are pretty clever and have the potential, on paper, of increasing the U.S. and Canadian share of North American production and somewhat decreasing Mexico’s,” said James Rubenstein, a Miami University professor of geography who has written extensively on where and how cars are made. “But I think these are marginal changes that might affect individual carmakers rather than the industry as a whole.”
A U.S. auto and parts industry group that advised Lighthizer wrote to U.S. trade officials a few days ago that the negotiated auto rules were “workable and manageable.” The group’s bigger concern recently was the possibility that Canada could be excluded from the deal after the U.S. and Mexico already had come to terms in late August. Trump had threatened to freeze out Canada, which would have been hugely disruptive because automakers have developed an extensive North America-wide supply chain since NAFTA took effect in 1994.
In the new pact, 75% of a vehicle’s content would have to be produced in North America to qualify for tariff-free trade among the three countries. That’s an increase from NAFTA’s 62.5% level.
Another key provision in the proposed U.S.-Mexico-Canada agreement adds a requirement that 40% to 45% of a vehicle’s content must be produced by workers making at least $16 an hour. That also would be phased in over several years. Analysts said most carmakers would not have trouble meeting that, although VW, Nissan and some others with large Mexican operations could find it more challenging.
VW didn’t immediately respond to a request for comment. A Nissan spokesman said Tuesday: "We’re encouraged that an agreement was reached, and hope that it appropriately considers the impact on our employees, suppliers and customers.”
The trade deal, which must be ratified by the legislatures of all three countries, also includes side agreements that would exempt up to 2.6 million passenger vehicle imports into the U.S. a year apiece from Mexico and Canada if the U.S. imposes a new 25% global auto tariff on national security grounds, as Trump administration officials are considering.
Last year, the U.S. imported about 2.3 million vehicles from Mexico and about 1.8 million from Canada. Given the 2.6-million-unit quota for both countries on potential car tariffs, that could ultimately lead to more cars being produced in Canada because it has considerably more capacity under that limit.
“Canada is actually in a good position coming out of this,” said Eric Miller, president of the consulting firm Rideau Potomac Strategy Group and advisor to the Canadian government on trade affairs.
The North American-content percentage increases to 66% on Jan. 1, 2020, and then goes up in annual increments to 69% and 72% before hitting 75% in 2023.
The provision recognizes “the reality of today rather than fundamentally changing it,” said Shannon K. O'Neil, an expert on Latin America at the Council on Foreign Relations, a U.S. think tank. Nonetheless, she expects it will still affect decisions by automakers to stay within those requirements.
“As GM or other companies choose their suppliers, they’re going to have to be careful those percentages line up,” O’Neil said.
For Mexico, the more difficult provision will be the new wage requirement for gaining tariff-free treatment — that 40% of the content of cars and 45% of trucks are made by workers earning at least $16 an hour.
Average hourly earnings for auto manufacturing workers in Mexico were $7.34 last year, compared with $28.98 in Canada and $29.08 in the U.S., according to the Center for Automotive Research.
Mexican Economy Secretary Ildefonso Guajardo has said that 70% of his nation’s passenger car exports could make that wage threshold “with some effort” by 2020. The remaining vehicles will need more time to reach the new levels, he said.
“Every company is just going to do the mix and match to get to the 40% in different ways,” Rubenstein said.
In the meantime, even if they can’t meet the content level for a tariff exemption, passenger cars entering the U.S. would just face the standard duty of 2.5%. Consequently, manufacturers with significant operations in Mexico might decide to simply pay the low U.S. tariff rather than adjust their supply chains.
The calculation will be different on imports of pickup trucks and most sport utility and crossover vehicles, which the U.S. hits with a 25% tariff.
“There may be some vehicles that just aren’t sold in the U.S. market any more 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 Center for Automotive Research.
The major effect of that provision probably will be a slowdown in efforts by China to send auto parts to Mexico. And over the long run, the more-stringent auto rules could make it harder for Chinese and other car and auto parts makers from entering or boosting their sales in North America.
Schuster, of LMC Automotive, said automakers could alter their supply chains to meet the high-wage requirement. For example, using an engine assembled in the U.S. would be enough for a vehicle built in Mexico to hit that 40% to 45% level.
“It’s going to be a complicated math problem for each of the manufacturers,” he said.
The additional requirements to track, calculate and document the value of the parts, research and other inputs will almost certainly make things more cumbersome and costly for auto and auto parts firms — some of which could be passed on to consumers.
“The whole thing is exponentially increased in terms of bureaucratic paperwork,” Rubenstein said. “That’s where the costs are going up, not on the production side, on the bureaucratic side to monitor this stuff, from the carmakers, part suppliers and the government.”