There’s a new US-Mexico-Canada trade agreement after more than a year of high-stakes drama. President Trump’s fingerprints are all over the deal, announced September 30, a renegotiation of the North American Free Trade Agreement (NAFTA), which took effect in 1994.
Trade deals typically aim to boost commerce among countries. What’s different about the US-Mexico-Canada Agreement (USMCA)? Trump’s signature innovations showcase new attempts to make this type of deal result in less trade, not more. Here are four novel, trade-restricting elements:
1. NEW RULES FOR HOW TO MAKE A (NORTH) AMERICAN CAR MEAN LESS TRADE IN AUTOS
The Trump administration demanded a new approach for how automakers in Mexico and Canada must build cars and trucks to continue selling to US consumers without having to pay import tariffs. The USMCA tightened NAFTA’s already complex “rules of origin”—the requirements to qualify for the zero tariff—and mandated that even more parts be sourced from North America, even if the parts are costlier than those available elsewhere. And for the first time, a minimum amount of a car must be produced by workers earning above a certain wage.
Here’s what this means. The wage rule disincentivizes investment and production in Mexico, where pay scales are lower and production is less likely to qualify. This, by itself, is likely to reduce US auto imports from Mexico.
But a second effect involves how these rules work to reduce auto exports to the rest of the world from Mexico, Canada, and the United States. Constraining access to auto parts makes North American production costlier and the region’s cars less competitive. In Asia or Europe, automakers are not subject to Trump’s rules of origin.
2. GET READY FOR MORE AUTO TARIFF- AND TRADE-RELATED RIPPLES
Higher costs also mean US consumers will pay more for cars built in North America—and this could trigger more imports from Asia and Europe. But a surge in German-built Volkswagens and Japanese-assembled Nissans would seem likely to push Trump to follow through on his threats to raise tariffs on such vehicles from 2.5 to 20 or 25 percent. And the basic provisions of the USMCA do not protect carmakers in Mexico and Canada from the fallout of Trump imposing such tariffs.
Here’s why. Some companies may discover that satisfying Trump’s new wage and content rules is too costly and decide to assemble cars in Mexico and Canada that are “nonconforming” with those regulations. The Mexican government has estimated that 30 percent of current exports to the United States are nonconforming. For those cars, the tariff is the regular duty applied to other countries—such as in Europe or Japan—that do not have special trade deals with the United States.
Because Trump may increase that duty well above 2.5 percent, Mexico and Canada negotiated two distinct areas in the USMCA to try to shield cars being assembled in their markets from facing those tariffs. Each negotiated a side letter allowing exports at the lower rate if Trump imposes “national security” tariffs after completion of its ongoing investigation under Section 232 of the Trade Expansion Act of 1962. And Mexico negotiated a separate Annex 2-C to allow its cars continued access to the US market if Trump raises the US tariff above 2.5 percent for other reasons.
But Trump’s negotiators closed two additional loopholes that will limit such trade in the event that Trump increases this tariff. First, Mexico can access the 2.5 percent tariff only if it satisfies the original NAFTA rules for autos, including that 62.5 percent of the value of a car be made from North American parts. This means companies assembling in Mexico cannot import more engines or drivetrains from Asia or Europe to keep costs low. Second, the number of Mexican cars coming into the United States under this scenario is limited to 1.6 million units per year.Read More