This could be right, with one big caveat: the companies are going to need Canada to join the deal, too.
The preliminary agreement announced Monday allows carmakers to import vehicles duty-free if 75% of the content is made in the US and Mexico. That’s up from 62.5% minimum under Nafta. Under the US-Mexico deal, as much as 45% of parts will also have to be made by workers who are paid more than US$16 an hour, according to US Trade Representative Robert Lighthizer.
“The vast majority of vehicles made in the US, Mexico and Canada are above the requirements,” said Kristin Dziczek, vice president of industry, labor and economics at the Centre for Automotive Research in Ann Arbor, Michigan. “If Canada doesn’t sign on, it’s a problem.”
To meet the proposed rules, automakers would need to be able to count the Canadian content on some of their current models, Dziczek said.
Dodged bullet
Prior to Monday’s announcement, the Trump administration had been threatening tariffs of as much as 25% on vehicles imported from any country. That would hit automakers hard, including GM, Fiat Chrysler and Toyota Motor Corp. The three are the only carmakers that researcher LMC Automotive expects to sell more than 1 million imported vehicles in the US this year.
In addition to dodging that bullet, the agreement marks a significant backtrack from some of the initial proposals that the Trump administration floated in Nafta negotiations, including an 85% Nafta-sourced parts content requirement and a 50% US-sourced provision.
GM and Fiat Chrysler shares each rose 4.8% on Monday in New York trading, while Ford finished up 3.2%, the stock’s biggest advance since February.
If Canada signs on, all but a handful of cars would meet the requirements or come close, Dziczek said. Most of those that wouldn’t hit the targets would be imported by European and Asian carmakers, including Volkswagen AG and Nissan Motor Co, she said.
Costlier cars
If vehicles don’t meet the requirements, they’ll be hit with a 2.5% tariff, the same levy faced by countries that have most-favoured nation status under the World Trade Organisation. That’s not going to be enough of a tax to get companies to move an assembly plant to the US from Mexico, but it’ll raise the price of vehicles, said Michelle Krebs, a senior analyst with AutoTrader.
“We think car prices will rise,” Krebs said in an email. “The new agreement will push production costs higher on Mexican products – parts and vehicles – which will eventually be paid for by American consumers.”
The good news for carmakers is that Canada will likely sign on to a similar agreement, said Mark Wakefield, head of the auto practice at consultant AlixPartners. So long as a Nafta replacement doesn’t penalise Canada’s agriculture industry, it should be easy to get a deal.
“I don’t see why Canada wouldn’t be OK with the terms as is,” Wakefield said by phone. “At the moment, it looks positive.”