Free Trade

NAFTA Rewrite Could Warp Automakers' Supply Chains, Increase Prices

Trump's new United States Mexico Canada Agreement mostly maintains the NAFTA status quo, but it sets new mandates for cars made in Mexico and Canada.

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Rebecca Cook/REUTERS/Newscom

Officials from the United States, Mexico, and Canada inked a rewrite of the North American Free Trade Agreement (NAFTA) last night. President Donald Trump today touted the results as "one of the greatest deals" ever made—a sharp contrast with his years of criticism of the old NAFTA. But while the new agreement makes significant changes to how cars and trucks can pass across borders tariff-free, it otherwise amounts to a cosmetic overhual of the 24-year-old trade deal.

One of those cosmetic changes—an apparently important one for Trump, based on his Twitter feed—is a new name for the agreement. Going foward, it will be known as the United States Mexico Canada Agreement (USMCA). Congress will have 60 days to review the new agreement before holding an up-or-down vote on it.

In the new deal, the United States has the power to put tariffs on cars imported from Canada and Mexico, although the first 2.6 million automobile imports would be tariff-free. And beginning in 2020, when the USMCA is supposed to take effect, cars and trucks must have 75 percent of their component parts manufactured in North America in order to move across borders tariff-free. That's a significant increase from the 62.5 percent threshold required under NAFTA.

Another new rule requires that auto workers in all three countries must earn at least $16 per hour—about three times as much as the typical Mexico automaker now earns, according to The Washington Post's Heather Long. While that rule is meant to protect American automaking jobs from being shifted south of the border in search of cheaper labor, it also amounts to a continent-wide minimum wage that will discourage automakers from building cars in North America.

Under current World Trade Organization rates, the United States does not impose auto tariffs of more than 2.5 percent (although light trucks are subject to higher tariffs). That means it may end up being cheaper for carmakers to build overseas, ship cars into the United States, and pay the tariff rather than paying the higher wages to North American workers.

"I think this creates a weird incentive," says Clark Packard, a trade policy analyst at the R Street Institute. "Companies could instead just forgo duty-free trading under USMCA and instead pay the 2.5 percent WTO rate to ship into the United States."

The so-called "rules of origin" requirements and the new wage mandates might undercut the Mexican auto industry. The Mexican government estimates that about 30 percent of cars currently made there would not meet the new requirements.

It may also give the Trump administration reason to pursue higher tariffs against imported cars. If automakers respond to the new deal by choosing to build more cars overseas and simply pay the 2.5 percent tariff, Trump may try to raise that tariff to bully those same automakers back into the North American labor market, warns Chad Bown, an analyst from the Peterson Institute for International Economics, a trade think tank.

Either way, American consumers will likely end up paying higher prices for new cars.

"Tighter rules of origin, potentially combined with import restrictions on nonconforming autos, would mean higher consumer prices for Mexican or American-made cars," Bown wrote last month after the new rules of orgin requirement were unveiled. "Such a price increase would trigger a natural incentive for Americans to switch to relatively cheaper cars assembled outside of the region that are not subject to Trump's costly new regulations."

The deal does not remove steel and aluminum tariffs on imports from Canada and Mexico. At a press conference today, Trump said those tariffs would be part of future discussions between the three nations.

The best part of the USMCA may be the fact that it exists at all. After entering office with a promise to tear up NAFTA, Trump has seemingly been convinced of the agreement's value. Tariffs and automaking regulations aside, the new agreement will keep the economies of the U.S., Canada, and Mexico linked. That's undeniably a good thing. Since NAFTA was inked in 1994, U.S. exports have tripled and the total value of goods traded between NAFTA partners has jumped from $293 billion in 1993 to about $1.1 trillion in 2016, according to the Congressional Research Service.

There's still a ways to go before this rewrite of the three-way deal is finalized. Nothing will be finished until after the midterm elections, though reaching a deal on Sunday night does allow the USMCA to be wrapped before Mexico's government changes hands on December 1.

The bottom line? It's marginally worse than NAFTA, but it mostly retains the status quo. "We spent a lot of time and political capital," says Packard, "to essentially tinker around the edges."

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48 responses to “NAFTA Rewrite Could Warp Automakers' Supply Chains, Increase Prices

  1. I thought trade deals were always good.

    1. This is normally true, but this might help Trump politically, so its bad. (Real comment – I’m going to have to do a shit ton more reading to figure out the fuck actually changed with this one)

  2. So you’re saying it’s a trade deal, and like all of them has pros and cons.

    1. Pro: It’s not named NAFTA any more, and Trump hated NAFTA! So things have CHANGED, Obama-Trump and Trump-Obama are both in favor of CHANGE…

      Con: It’s not named the Trump Agreement! Very sad, even bigly sad…

      1. So Trump can say he got rid of NAFTA (even though he replaced it with something mighty similar).

  3. Always trust articles that are written completely on “coulds” and “mights.”

    1. I could do that, but I might not.

  4. Congress will have 60 days to review the new agreement before holding an up-or-down vote on it.

    Unless someone out there has a vague memory and no evidence credible accusation of being sexually assaulted by it at a party 35 yrs. ago. Then we’ll have to wait for the full FBI investigation.

    1. I once was jerked off with a printed out copy of NAFTA. We need to eject that as soon as possible.

      1. So you couldn’t read page 3 as it was stuck to page 2?

    2. Yeah, and the accused will mount a large number of proven lies.

      1. Fuck off Hihn.

  5. This is exactly what I expected would happen – Mexico and Canada humoring Trump and letting him rename NAFTA without actually changing much. Will it be enough to trick his brain dead followers into thinking he pulled something off here? I predict yes.

    1. Yes. I’ve already heard it from my brain-dead friends: “See! Tariffs work!”

      Idiots all.

      1. Tariffs don’t work?

        Or, do they work, but what they accomplish sucks?

        1. If anything, this would be the correct answer. I still think mild and broad tariffs as a replacement for other taxes being lowered would not be a bad thing… But whatevs. I just hope he roasts China on a spit over this stuff, because we have them by the short and curlys if we want to push it.

          1. At the same time fucking over Americans who want to trade with China? What gives him or America the right?

            1. Nobody cares about your delusional purist libertarian shit. I’m more libertarian than 99.5% of the population and I don’t even care.

              Until Libertopia exists, we’re all tied together economically as citizens of the same country. Like it or not, that is reality. If Trump gets China to open up their markets, we will export more, hence more jobs and a stronger economy. The fact is that if the US economy overall does better, you and I will both do better as a result. If the US economy is stronger, my taxes can go down, as will yours. Etc.

              The thing you blistering idiots seem to not understand, is if they open up their markets, we will lower what few barriers we have even further! This is the offer that has been made.

              I REALLY wish that I negotiated with moron, cowards like you in my business dealings. People so stupid that they don’t understand the concept of leverage, or that sometimes you need to make short term sacrifices for long term gains.

              I won’t argue that it is immoral from a libertarian perspective in the short term to use tariffs as leverage… But in the real world, not la la land, using our leverage is the ONLY way to actually achieve real free trade. That you’re too daft to understand this is mind boggling. Without leverage, China will NEVER remove barriers. That is to say a non libertarian short term action might create a MORE libertarian long term outcome.

    2. The Canadians and Mexicans went easy on us, perhaps looking ahead to a post-Trump world. Had they agreed to name it the “TRUMP Great American Agreement,” America’s current negotiators probably would have agreed to provide a free car to every Mexican and Canadian at American expense.

      1. “The Canadians and Mexicans went easy”

        No one cares about your rectum.

  6. …essentially tinker around the edges…

    This is a stupid statement. A tripling of Mexican labor costs is mind boggling.

    1. Yes. That is pretty significant if true. I’m curious what the angle is on it if Mexico agreed to it.

      1. I suspect Mexican located automakers will be caught paying their workers $16.00 per hour but then have a $10.00 per hour “Union Fee” for negotiating this contract.

    2. Well, the obvious effect will be fewer jobs moving to Mexico. Mexico probably agreed to it because they will retain more jobs than if Trump had truly just walked.

      Also, there may be loop holes. For instance did auto workers in Mexico get health benefits already? If so, perhaps they can raise the wage, and cut those benefits because they’re not specifically called for in the agreement. There could be some kind of a weasel move in there like that for them. Loopholes baby!

      Whether or not this will result in more cars imported from other countries is debatable… I mean the vast majority of cars are made in the USA, Canada, or Mexico for the north American market. Very few Asian brands are even actually shipped over here from there. So if it were cheaper to manufacture in XYZ country versus American wages NOW one would expect that to be happening NOW already. Other than Mexico it really doesn’t happen much…

      So it will likely just shift jobs to Canada and the USA, and away from Mexico. Which was what Trump was shooting for.

  7. Shouldn’t it be Canada Unitedstates Mexico, or ‘CUM deal’ for short?

    1. Mexico United STates Canada, and United states again, Motherfucker.

      MUSTCUM

      1. Canada, United states, Mexico Super High Output Trade Agreement.

  8. It’s good to know that people are still getting suckered by politicians.

    1. You mean the people like Reason who were convinced Trump was going to cause a TRADE WAR!! and destroy the world economy? Who got suckered here? Looks to me like reason and their fellow idiot travelers did.

      1. Looks to me like you don’t buy steel for a living like I do, John. When steel pricing comes back down I’ll listen to how great Trump is. Until then fuck him and his taxes on my work.

        1. Steel prices were already taxed and artifically higher than free market steel prices would be pre-Trump.

          you were already paying more for steel pre-Trump..

        2. Well, that’s the rub about having uni-directional free trade bro. There are winners and losers with all the manipulation. If China caves, which 100% could happen if we turn up the heat enough to put their economy on the brink, then we’ll see how mad you are. Time will tell.

          1. So gotta break a few eggs to make an omelette, eh? Sounds pretty fucking communist to me. Either you support the primacy of individual rights or the primacy of the “nation”. You can’t support both.

            1. I support living in reality. Which is to say BOTH.

              100% purist libertarianism (anarchy)will never exist in the real world. It’s every bit as flawed an idea as communism is for functioning IRL.

              Therefore, once one accepts this, one accepts the need for SOME amount of government. Once one does that, one can live in reality. I would cut the bullshit government we have now by 95% or more, but that doesn’t mean NO government.

              Any which way, your stupid twit, when the government is negotiating things that only a government can negotiate… You are basically demanding they sign off on a deal that is bad for the majority of the country, rather than use our leverage to negotiate a deal that is better for everybody in the country?

              How does that make any sense. In truth we should have demanded true free trade decades ago when we opened ourselves up to trade with China. Then the status quo wouldn’t have been upset if they declined. However since we had incompetents/traitors negotiating our deals then, it has to be done now. The alternative is to allow a shit deal to stand, simply because it is the status quo. You fail to realize that if we pushed the envelope the outcome will be a MORE LIBERTARIAN outcome than the status quo.

              How this escapes anyone is insane. Saying that a shit status quo can never be changed is an idiotic idea.

  9. Yet another Trump blunder. His loyal trolls will of course claim a victory.
    One bright spot, the agreement was negotiated, not bulled. He’s learning how to make a deal, just needs to learn how to make a good one.

    1. Shut up Hihn.

    2. I love it when even Hihn realizes he got Trumped.

  10. I can’t understand the Trump-hate so blindly oblivious to all the great things Trump’s trade deals have wrought. Why, US Steel alone has opened 8 or 9 new steel plants, up from 8 last week and 7 the week before and 5 or 6 a month ago. By election day, I’m assuming US Steel will have opened well over a dozen new plants, adding trillions of dollars to our economy and tens of millions of jobs.

    1. Nope. That would be amazing since they only have four plants. They are planning to reopen one mill that had been shut down. USS has not been turning profits as fast as their competitors such as Nucor which uses newer less expensive technology and focuses on recycling steel.

      The CEO of USS is focused on cutting costs to generate profits. They are making some improvements but there are no six new mills, that is a trumpism.

      If they are blowing through cash betting on higher prices from tarrifs that would be a huge mistake. The lack of enthusiasm among investors reflects that.

      1. He got you bro.

        1. Haha. I took the bait on that one.

  11. > [The minimum wage] rule is meant to protect American automaking jobs from being shifted south of the border in search of cheaper labor…

    At least they’re being honest about it. When unions first called for minimum wage laws to prevent blacks from taking their jobs they told everyone it was to make sure everyone got a “living wage.”

  12. Reason, so you focus on cars..but wait cars are bad because they cause climate change so we won’t be importing cars anyway because of Tesla right?

    I think it’s also bad you only focus on one part of the deal. Dairy farmers are happy at the moment. What other details are you ignoring?

    I know Trump bad. Cops bad. Drugs good. No borders good. Tony, Rev and Shrike, BP, Hihn, are all American heroes.

    * Paid for by I remember with Nick wore leather jackets and TDS didn’t exist

    1. I do wonder… I haven’t looked into it yet, but will have to go seek out some pro Trump news site to read about it. I would imagine there are some other perceived “wins” in there as well. Whether or not they actually will be is up in the air of course. I mean we will likely get more US auto jobs out of this, and probably also slight increases in car prices. As with all these things there are pros and cons.

      NAFTA wasn’t even really bad as far as trade agreements go from everything I know… It was mainly just that Mexico can kick our ass on costs thanks to their low wages, and combining that with their proximity to the US (low shipping costs), they sucked a bunch of jobs out of the USA. That’s sort of inevitable with low wage nations, unless you tariff their shit. But AFAIK they didn’t have any market barriers there against us like China does, it’s just that their wages made us buy more stuff from them than they bought from us.

  13. Whether or not this deal was good or not should be irrelevant. It was based on a principle that all libertarians should find abhorrent: that the collective good is more important than individual rights. That the government has a right to restrict the freedom of individuals if it feels it is in the interest of the group. That is why so many here are pissed off and hate Trump. His instincts and actions are socialist at heart. I don’t give a fuck about the American economy, or how well my neighbors are doing financially. All that I care about is how free they are and I am. I don’t want the government “winning” on my behalf. I never asked for their help and I don’t want it.

    1. Libertarians like you are why libertarianism will never go anywhere. I’m a real world libertarian, in that I accept the concept of limited government. But that is not no government. People can accept and get behind the idea of VERY limited government… But Anarcho-Capitalism is never gonna happen. And frankly I think it would make for a far shittier world than one filled with USA circa 1800 style governments.

      As mentioned elsewhere, you also fail to realize that in the case of China Trump is pushing for freer trade both directions… In what twisted mind is that a bad libertarian outcome??? That we have to twist their arm to get it done is obvious, because without incentive they have no reason to ever do it. You people live in a world that is so divorced from reality it is mind boggling.

      Principles and pragmatism must be balanced out dude. Pure adherence to libertarian principles would have meant we still had the Queen of England on our money… Thankfully the founders weren’t such deluded idiots as some of the writers/commenters here at Reason.

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