US, Canada agree to new NAFTA terms

US, Canada agree to new NAFTA terms

Minimal impact expected on auto industry as Canada agrees to NAFTA updates, change in pact name to USMCA.

October 2, 2018

Cleveland, Ohio – The United States and Canada agreed to terms to renegotiate the North American Free Trade Agreement (NAFTA) in time to get a deal completed before a new administration takes power in Mexico.

U.S. and Mexican negotiators reached a dealer earlier this year.

Now to be called the U.S. Mexico Canada Agreement (USMCA), the agreement updates NAFTA by adding rules for e-commerce, includes new intellectual property rules, more access to Canadian dairy markets for U.S. milk producers, and several minor tweaks to the 25-year-old agreement.

“USMCA is a great deal for all three countries, solves the many deficiencies and mistakes in NAFTA, greatly opens markets to our farmers and manufacturers, reduces trade barriers to the U.S., and will bring all three great nations together in competition with the rest of the world,” Trump said.

Tariffs for steel and aluminum produced in Canada and Mexico remain in place, though officials will all three countries agreed to work to resolve trade disputes concerning metals.

Prospects for a deal looked slim last week as Canadian and U.S. teams remained far apart on Canadian dairy protections and Canada’s demand to keep a dispute-resolution system in place. That impasse led to President Donald Trump issuing threats to place high tariffs on Canadian-made cars and car parts – a move that could have been catastrophic to Ford, General Motors, Fiat Chrysler Automobiles (FCA), Toyota, and Honda, as those companies make vehicles in Canada. It could also have disrupted supplies of Canadian-made auto parts to U.S. and Mexican car plants from other automakers.

The deal’s terms that have the biggest impacts on auto production were already part of the Mexican deal. Automakers must use more parts from North American countries to maintain tariff-free status, and more of the work must be done by workers making more than $16 per hour. Neither regulation is expected to impact production much as almost all production today meets both standards.

Automakers can include white-collar expenses in that $16-per-hour calculation, meaning a car produced for low wages in Mexico can include the engineering, marketing, and administrative expenses to achieve up to 15% of that target.

Gary Cohen, a global trade and supply chain professor at the University of Maryland, says the use of white-collar wages to offset low production costs in Mexico “creates an advantage for U.S. automakers, over their German, Japanese and Korean counterparts, because of the amount of research and development done in an automaker’s headquarter countries.”

The deal still faces lawmaker approval in all three countries, but many lawmakers expressed support for the updates and new program name, making passage likely.

About the author: Robert Schoenberger is the editor of Today's Motor Vehicles and a contributor to Today's Medical Developments and Aerospace Manufacturing and Design. He has written about the automotive industry for more than 18 years at The Plain Dealer in Cleveland, Ohio; The Courier-Journal in Louisville, Kentucky; and The Clarion-Ledger in Jackson, Mississippi.