Canada, its largest trading partner, the United States and Mexico have agreed to the USMCA (United States-Mexico-Canada) Trade Agreement to replace the existing NAFTA.This is the first trade deal between major auto producing nations since the original NAFTA that sees the Regional Value Content (RVC) for automotive production go up in the region.
A higher RVC in vehicles means that if an automaker wants to sell to a consumer in the 3 countries, it needs to source more of its content from those 3 countries.
In the USMCA, the vehicle RVC level rises from 62.5% to 75% – a 20% increase. That means more local activity and jobs. To get to the NAFTA RVC, an automaker will track the local content in 29 automotive parts categories. To be eligible, the RVC of those automotive parts must be 60%.
The USMCA also expands the list of categories and raises the automotive parts RVC as high as 75% – a 25% increase from 60% – through the supply chain
The North American automotive market is approximately 21 Million units annually and is the most sought-after consumer market in the automotive world. Raising the thresholds to access it, benefits companies that have invested in plants and people in the USMCA.
While the cost of an automobile may increase marginally if manufacturers are required to source more supplies from within the NAFTA region (rather than from the cheapest global sources), the benefit will be more investment in Ontario and in many US and Mexican States and less in places that only sell to us, but do not buy from us.
In auto, the USMCA addresses the protectionist needs of the current administration but wraps in its purview Canada and Mexico as primary partners.
Side agreements for exemptions on tariff threats remain the challenge of 2018. Canada and Mexico achieved an insurance policy on this which is worth noting. All vehicles in NAFTA will need to meet a minimum threshold of 40% being made by workers making at least $16 per hour.
The US is committed to raising the cost of importing automotive goods there. The 232 tariffs and WTO/MFN process will ensure it. Canada and Mexico negotiated exemptions from these at production levels that materially outpace export growth models to the US over the next 5-10 years. Specifically, Canada will be permitted to ship 2.6 million vehicles annually and $32 Billion in automotive parts to the United States tariff free.
Ending that process with a deal that increases investment and more competitive market access for Canada is extraordinary.
Today, I want to give full credit for our success on NAFTA/USMCA to Chrystia Freeland, Canada’s Minister of Foreign Affairs, Team Canada and the Government of Canada. The non-partisan, public/private effort was amazing and we are proud to be a footnote in this history’s chapter.