President Donald Trump began banging the drum for replacement of the North American Free Trade Agreement before he became president. Once elected in 2016, he made it a focal point of his first year in office, and as of now, it’s one step closer to reality.
The initial agreement was signed by the three nations – Mexico, Canada and the U.S. – in September 2018, but the Congress must approve any trade deal and half of that approval came late Tuesday night when the U.S. House of Representatives agreed to the deal. Senate majority leader Mitch McConnell said he has no plans to put it before the Senate before they recess for the year so it’s unlikely it gets approved until 2020.
However, this version has a few changes to it mandated by House Democrats. Automakers have been pushing for the House to finish up its negotiations so they can get on with this brave new manufacturing world they’ll be entering. So what’s on tap for the automotive industry, once it’s finally ratified by Congress?
Well, unsurprisingly one of the big pushes by the Trump administration didn’t go away: More U.S. content on cars, utility vehicles and trucks. To qualify for zero tariffs under the new deal, a car or truck must have 75% of its components manufactured in Canada, Mexico or the United States. That’s a considerable jump from the current 62.5% mandate, Reuters reported.
Not only does the new deal require a percentage of vehicles be made in one of the three countries, there are tougher rules for the workers producing those vehicles and components — and it doesn’t favor Mexico.
In the near future, cars and trucks must have at least 30% of the work on the vehicle done by workers earning $16 an hour, or about three times what the typical Mexican autoworker makes. That figure rises to 40% for cars by 2023.
Additionally, the changes to the deal make it easier for workers in Mexico to unionize, which the Trump administration, Democrats and U.S. manufacturing unions believe will cause wages for Mexican workers to rise. For every dollar a Mexican worker’s hourly wage jumps, U.S. manufacturing becomes that much more competitive, union officials have argued consistently for some time now.
U.S. Trade Representative Robert Lighthizer squeezed in a more stringent definition of steel and aluminum for Mexico in the deal’s automotive rules of origin — to be “melted and poured” in North America. While USMCA originally required 70% of the metals used in North American vehicle production come from the region, however, it did not specify production methods. This could allow for the use of semi-finished metals from China and elsewhere, the Washington Post noted.
Mexico and Canada agreed to a seven-year phase-in of the new standard for steel, Mexican officials said. The aluminum demand was dropped, but with the caveat that it would be reconsidered in 10 years.
It’s not all bad for Mexico in the updated deal. It and Canada get assurances that Trump cannot hit them with a new tariff out of the blue. The administration signed “side letters” allowing the two nations to avoid Trump’s auto tariffs.
Additionally, the letters permit the two countries to continue sending about the same vehicles and parts across the border free of charge, regardless of any auto tariffs that may be imposed later. Only parts above that quota could face charged.
The USMCA gets reviewed in six years. If all the nations still approve, then it expands to the full 16-year period and can be renewed after that for another 16 years.
Many economists think the new rules will help some North American workers, however, there are concerns that vehicle costs may rise as a result of the changes, which means that new car, truck or ute is going to cost more because automakers will simply pass those increases along to consumers. It could also result in some small cars being produced in Asia, not North America, because they would be too expensive under the new deal.