There’s a new trade agreement between the United States and its neighbors to the north and south. But don’t call it NAFTA.
The United States-Mexico-Canada Agreement, or USMCA, tentatively replaces the 24-year-old North American Free Trade Agreement and fulfills a campaign promise of President Trump, who said he would renegotiate the trade deal or get rid of it entirely.
However, the new trade deal with Canada and Mexico leaves much of NAFTA intact, which is a good thing.
NAFTA, which was enacted when President Bill Clinton was in office, has been beneficial to the North American economies and the average citizen, according to several economic analyses. Economists have said that withdrawing from NAFTA or renegotiating NAFTA in a way that reestablishes trade barriers will adversely affect the U.S. economy and cost jobs.
I was a cub automotive reporter at Ward’s Automotive Reports when the trade agreement was passed, and I reported on it extensively. I also covered the Canadian auto industry for several years and had annual one-on-one interviews with the presidents of General Motors of Canada, Ford of Canada and Chrysler Canada. The relationship between the two countries was strong and the agreement was seen as beneficial to automakers on both sides of the border.
It has troubled me to see NAFTA disparaged in recent years.
The new treaty could be signed by all countries within 60 days, and will then need to be passed by the U.S. Congress. While details of the new deal are yet to be finalized, agreement on new trade guidelines across North America is an important milestone for the auto industry.
U.S. Trade Representative Robert Lighthizer and Canadian Foreign Affairs Minister Chrystia Freeland said in a joint statement USMCA "will strengthen the middle class, and create good, well-paying jobs and new opportunities for the nearly half billion people who call North America home.”
The auto industry has much to lose when it comes to retooling the trade agreement.
"At first blush, the USMCA deal appears to be saving the automotive industry some major headaches, but we're not quite out of the woods yet,” says Ivan Drury, Edmunds' senior manager of industry analysis.
The elimination of a 25% tariff on imported vehicles is a huge win, but the new regional value content requirements mean that automakers will not be able to source parts as freely, so there will be added costs associated with vehicle manufacturing, he notes.
“Depending on how high these become, there could be setbacks to standard vehicle content -- or more content could become optional with higher markups,” Drury says. “Given that new vehicle prices are already stretched to record highs, things could take an ugly turn for consumer wallets, especially considering the trend of continuously rising interest rates.”
Nearly a quarter of all new vehicles sold in the U.S. are assembled in either Mexico or Canada. And given decades of supply chain evolution based on NAFTA, a substantial portion of the vehicles assembled within the U.S. are dependent on components from Mexico and Canada.
“The new deal ensures the availability of a diverse set of vehicles -- from the most affordable compacts cars to the most popular pickups -- and will prevent a surge in pricing,” says Jonathan Smoke, chief economist, Cox Automotive.
That said, the industry could still face price problems caused by new tariffs.
“Nearly a quarter of new vehicles bought by Americans are assembled in countries outside of North America, and a substantial number of vehicles sold are dependent on parts from countries like China that remain very much in the cross-hairs of the administration,” Smoke says.
The agreement is great news for the automotive industry because, once it is approved, "longer-term strategic sourcing and manufacturing planning in the region can finally resume,” adds Charlie Chesbrough, senior economist, Cox Automotive. “Strategic planning for the North American industry has been in a constant state of flux over the last 18 months due to volatile trade policies.
Now, with some clarity around the import tariff policy for the region, suppliers and automakers can refocus on making and selling products, he says. However, the steel and aluminum tariffs remain, and both are having negative effects on automakers' profitability.
Since it's more than 1,000 pages long, we won’t fully understand the overall impact of the trade agreement negotiated over the weekend without further study and until it is officially approved later this year, says Michelle Krebs, executive analyst, Autotrader.
“However, the fact that there is a directional agreement at all, one that has a long-term horizon of 16 years and will allow automakers and their suppliers to do long-range planning, is a plus,” Krebs says.
The American International Automobile Dealers Association welcomed the news.
”Uncertainty is the enemy of business, large and small,” says Cody Lusk, president of the AIADA, which has 9,600 dealer members.
However, the trade group remains “deeply concerned” over the threat of massive new tariffs on imported autos and parts.
“Dealers will continue to urge the Trump Administration and Congress to pursue positive trade policies that keep the American auto industry open, dynamic, and competitive,” Lusk says.
If you have friends or family in a state like Ohio or Kentucky where Honda and Toyota have a huge manufacturing presence, your perspective on what is and isn’t “American” might change. Regulating trade isn’t as simple as what some politicians seem to believe.