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USMCA could increase cost of vehicles, says Scotiabank report

USMCA could increase cost of vehicles, says Scotiabank report

Alicja Siekierska, Yahoo Finance Canada
October 2, 2018

While the United States-Mexico-Canada Agreement (USMCA) has brought some stability and certainty back to the North America auto industry, one report says administrative and higher wage requirements introduced in the deal could potentially raise the price of vehicles in North America.

The Scotiabank Economics report, which analyzed five of the most contentious demands raised by the United States during the trade negotiations over the last year, also says that the new deal could reduce competitiveness and lead to some automotive production shifting overseas.

“Over the longer-term horizon, USMCA’s extra administrative requirements and higher wage costs will likely increase the price of North American cars and reduce the international competitiveness of the industry – with the possible result that some production is eventually shifted overseas rather than re-shored to the U.S.,” the report said.

The USMCA, which was reached late Sunday after more than a year of negotiations, includes several new requirements that have been welcomed by many in the North American auto industry.

Flavio Volpe, president of the Automotive Parts Manufacturer’s Association, said the deal will increase investment and competitive market access for Canada. The moment the deal gets congressional approval in the United States, Volpe said he expects automakers that have been holding off on launching new programs will begin to take those investments off the sidelines.

Unifor president Jerry Dias, whose union represents thousands of Canadian autoworkers, said in a statement the deal delivers “significant improvements in auto” and helps stabilize future investment opportunities by lifting the “threat of capricious auto tariffs.”

Under USMCA, vehicles must contain at least 75 per cent North American content in order to qualify for duty-free access to the Canadian, American and Mexican markets, up from the current 62.5 per cent threshold prescribed under NAFTA.

According to the Scotiabank report, Canadian auto production facilities should find it “relatively easy” to comply with the new content requirements, as North American content in Canadian auto production already sits at around 71 per cent. Brett House, Scotiabank’s deputy chief economist and co-author of the report, said the Detroit Big Three automakers are in solid position when it comes to the new deal, as the vehicles produced in Canada contain more than 80 per cent U.S. content.

The North American content rules will be phased in over four years, giving automakers “a relatively long runway to adjust their production,” the report said.

The new deal will also require that at least 40 per cent of a vehicle’s content come from facility’s where the hourly wage is at least $16USD an hour, a move that could potentially shift some production away from Mexico, where wages have historically been significantly less than in Canada and the U.S.

Side letters to the USMCA also ensure that Canada will not be slapped with hefty tariffs on up to 2.6 million U.S.-bound imports of vehicles. A 25 per cent tariff on vehicles, which was repeatedly threatened by U.S. President Donald Trump, would have devastated the Canadian auto industry.

While House said the agreement is positive news in that it preserves tariff-free trade and removes the potential threat of a 25 per cent tariff, he said the new automotive rules could increase costs that may be passed to the consumer and reduce the competitiveness of the North American automotive industry overall.

“Over the longer term, it’s cost increasing for the North American industry for all three countries and reducing the competitiveness of the industry going forward,” House said in an interview.

“In the longer term, we could see some production simply picked up and moved overseas.”

But Volpe disagrees and said automakers will continue to build vehicles where they sell them — in North America.

“Yes, it will add costs in that it reshores activity … but you do not build cars on side of the ocean and deliver to the other side. That is not going to change,” he said.

Volpe also expects the U.S. administration to use Section 232 tariffs on vehicle and automotive part imports against other jurisdictions around the world, which will make the cost of exporting to the U.S. significantly more expensive.

“If the cost goes up within North America, it’s not going to go up as high as the cost of exporting into North America,” Volpe said.

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