Instant Search Results

  • Home
  • News
  • New Trade Pact Spares U.S. Auto Makers From Tariffs but Adds Restrictions

New Trade Pact Spares U.S. Auto Makers From Tariffs but Adds Restrictions

New Trade Pact Spares U.S. Auto Makers From Tariffs but Adds Restrictions
The U.S.-Mexico-Canada Agreement eases uncertainty about the Trump administration’s trade policies, helping auto makers move forward with factory investments

By Chester Dawson and Adrienne Roberts – The Wall Street Journal
Oct. 1, 2018

DETROIT—The new trade agreement struck Sunday night between the U.S. and Canada eases uncertainty in the U.S. auto industry about the Trump administration’s trade policy, helping car manufacturers to move forward on factory investments with greater clarity.

The tentative pact, which still must be approved by Congress, spares auto makers from costly tariffs on cars imported from Canada and Mexico, a major relief for an industry that has for more than two decades relied on duty-free trade to expand operations in North America.

But the new rules could also force car companies and their parts makers to alter their supply chains, potentially increasing costs at time when profits are already under pressure from slowing new-car sales in the U.S., industry officials and consultants say.

The late Sunday night deal reached with Canada moves President Trump a step closer to cementing a new trade deal for the continental bloc that will replace the North American Free Trade Agreement established more than two decades ago.

The new deal is a big win for Detroit’s Big Three auto makers, which rely heavily on their factories in Canada and Mexico to build cars and trucks for the U.S. market and are less exposed to the new rules than foreign-based rivals because many of their vehicles already meet the stiffer requirements, industry analysts say.

The new tri-country pact—officially to be called the U.S.-Mexico-Canada Agreement, or USMCA—overhauls the rules for auto trade in the region, requiring auto makers to build a greater portion of a car in North America and with higher-wage workers to avoid duties when crossing borders in the region.

The accord will also exempt up to 2.6 million vehicles imported annually from Canada and another 2.6 million made in Mexico from a proposed 25% tariff now under consideration by the Trump administration on foreign-built cars sold in the U.S., according to drafts posted to the website of the U.S. Trade Representative.

General Motors Co. GM +1.28% applauded the accord, saying it has long supported efforts to modernize the existing free-trade pact among the three countries. “This agreement is vital to the success of the North American auto industry,” the auto maker said in a statement.

Ford Motor Co. F +0.81% also said it supported the deal, while Fiat Chrysler Automobiles FCAU +2.51% NV didn’t immediately return requests for comment.

A lobby for all three of the Detroit-based auto makers applauded the deal and the Alliance of Automobile Manufacturers, a trade group representing 12 of the largest American and foreign-brand auto makers, called the pact an “encouraging development.”

But representatives for some foreign auto makers said it would complicate operations for manufacturers whose vehicles aren’t compliant with the new requirements.

The leading U.S. labor union for the industry said it would “withhold final judgment” until the details of the accord are clearer, but United Auto Workers President Gary Jones noted it “could have the potential to provide some needed relief for America’s working families.”

Mr. Trump has repeatedly blamed Nafta for the loss of manufacturing jobs in the U.S. and threatened to terminate the quarter-century-old pact if he couldn’t reach a deal with Mexico and Canada that is more beneficial to the American worker. The ongoing trade dispute has left the auto industry bracing for the worst and prompted some manufacturers to hold off on making investments in the region until the negotiations could be resolved, analysts and manufacturing experts say.

“The specifics on the new agreement will put uncertainty to bed and the industry will know the rules and how to play by them,” said Jeff Schuster, president of global forecasting at research firm LMC Automotive.

About 4.1 million cars and trucks were imported from Canada and Mexico last year, representing nearly a quarter of all new vehicles sold in the U.S. in 2017, according to LMC Automotive. That falls well short of the 5.2 million vehicles exempted under the new trade deal, a cap that doesn’t include light trucks such as most pickups.

It is unlikely Canada will exceed its 2.6 million vehicle export threshold anytime soon, said Flavio Volpe, head of the Canadian Auto Parts Manufacturers’ Association, noting that would require the “investment equivalent of three new production plants that sell exclusively to the U.S.”

The establishment of Nafta in 1994 was a major victory for the auto industry, which used the free-trade pact to re-source U.S. factory production, particularly on lower-priced small cars and compact sedans, to Mexico to take advantage of the cheap labor. Auto parts suppliers followed, building new factories along the U.S.-Mexico border and near the car assembly plants, making the country integral to the industry’s supply chain.

More recently, much of the new auto investment in North America has flowed to Mexico, with many foreign auto companies constructing factories to use as export hubs to the U.S. and other markets globally—a trend Mr. Trump has been trying to reverse.

The tentative deal for North America would require at least 75% of a car’s value be produced from parts and material made in the region, up from 62.5% under the current agreement.

Car companies would also have to ensure 40% to 45% of the vehicle is made by workers earning at least $16 an hour, a provision aimed at steering more work to the U.S. to generate manufacturing jobs. Vehicles that don’t meet the new rules will be subject to a 2.5% tariff.

Industry analysts, however, don’t anticipate the new accord will result in a windfall of new U.S. auto factory jobs because a 2.5% tariff is still too low to compel car companies to relocate assembly line work.

The pact also comes as demand for new cars and trucks is slowing in the U.S. and auto factory investment in the North American region has begun to taper off, following years of expansion during the postrecession boom.

“I don’t see anything huge in this that moves production to the U.S.,” said Kristin Dziczek, a labor and manufacturing expert with the Ann Arbor, Mich.-based Center for Automotive Research.

Many foreign-based auto makers, such as Nissan Motor Co. and Volkswagen AG, also have large assembly factories in Mexico that build models for the U.S. market and could be more exposed because they source more car parts, including engines and transmissions, outside the region.

The Mexican government anticipates about 32% of vehicles manufactured in the country won’t meet the new content rules. Those include many small cars and sedans that are built in Mexico and mostly rely on car parts manufactured at low-wage factories in the country.

Auto makers are more likely to stop selling those cars in the U.S., where buyers are already shifting to roomier crossovers and SUVs, than make massive changes to their manufacturing plans, industry analysts say.

On other models, the new trade pact could initiate some reshuffling in the auto industry supply chain as companies source more parts in the region and in higher-wage countries to meet the new rules—an effort that manufacturing consultants say is expected to inflate costs.

“Any changes would manifest long term,” said Ron Harbour, a manufacturing expert with consulting firm Oliver Wyman. “It doesn’t sound like it would trigger immediate changes. I think that was intentional.”

Auto makers remain concerned about the administration’s efforts to impose a tariff of up to 25% on imported cars and parts to the U.S.—a duty that would hit the Japanese and German brands the hardest. The U.S. Commerce Department is currently investigating whether the White House can use a national-security law to levy the tariff and must make a determination by February.

The tariff would apply to imports from outside North America, mostly those shipped to the U.S. by Toyota, VW, BMW AG and other foreign brands. Those vehicles represent about 22% of all U.S.-sold vehicles last year.

Auto executives have warned the hefty import tariff, which would also apply to parts manufactured overseas, could drive up costs, increase prices for consumers and potentially limit selection if enacted.

Click here for original article.

Archives