A Closer Look at Global Trade Agreements

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Ryan reports on the updated trade agreement for North America.

The automotive industry understands the power of branding. The same vehicle can be sold under different names, with only cosmetic differences, yet appeal to different buyers. My parents, shopping for a car in the 1980s, test drove a Chevrolet Celebrity, but ultimately chose the cachet of an Oldsmobile Cutlass Ciera. Years later, mom and dad would learn those two General Motors cars were the same size, had the same engine and were built in the same factory. But the Boyles just weren’t a Chevy family.

Earlier this month, the U.S. auto industry was relieved from a strategic risk that branding could not cure. On October 1, the U.S. and Canada agreed to revised terms of their free-trade pact. Coupled with the U.S.-Mexico deal previously announced, we can nearly declare that North America remains a free trade area.

President Trump insists the new pact be called the U.S.-Mexico-Canada Agreement (USMCA). Like auto nameplates, the branding is secondary to what’s under the hood.

Framing of winners and losers is counterproductive; sometimes, it’s less important to win than to simply not lose. With USMCA, Mexico and Canada gained by preserving access to their biggest export market. As in any good negotiation, each side made concessions:

USMCA contains revised rules of origin and new restrictions on wages. NAFTA required that automobiles must contain at least 62.5% North American content to be excluded from tariffs; USMCA has raised the floor to 75%. Additionally, up to 45% of an auto’s value must be made by workers earning at least $16 per hour. This was a major concession by Mexico, whose factory workers earn about a third of that wage.

In practice, these changes will increase the cost of cars. Impairing Mexico’s labor advantage will most immediately impact the lower-priced vehicles currently produced in Mexico. They have the lowest margins and are most sensitive to higher input costs.

As for Mexican-made vehicles that do not meet the 75% North American sourcing requirement: Manufacturers may find it more expedient to pay the U.S.’ tariff rather than rearrange supply chains. The current tariff would be 2%, though the U.S. has separately threatened higher tariffs on autos. Because these requirements make North American manufacturing more expensive, the U.S. risks impairing exports and incentivizing production abroad.