8 October 2018

A rose by any other name?

Whilst the United Kingdom government is still dithering and backstabbing over the arrangements for leaving the European Union, at least in North America there has been progress on the seemingly never-ending NAFTA negotiations. Last week, the three countries involved reached a compromise and agreed on a new trade deal, the US-Mexico-Canada Agreement (USMCA). The deal is significant, not least from Canada’s perspective, because the Trump administration had concluded an agreement with Mexico last month which seemed not to include its northern neighbour. The putative deal met with strong opposition, not least from the U.S. Congress which has to ratify the new arrangement.

So what has changed from an automotive perspective? Rules of origin for one thing. In order for new light vehicles sold in the USMCA region to qualify for duty-free status, 75% of their component parts must be manufactured within the region. This is an increase on the previous 62.5% mandated under the old NAFTA agreement and had already been agreed between the US and Mexico. There is also a stipulation that at least 40% of the vehicle is manufactured by workers whose wages average more than $16 an hour. This potentially means that we could see a shift in production northwards from Mexico where labour rates are substantially below its northern partners.

The biggest disagreement over the new proposals is likely to come from foreign carmakers who will have the greatest difficulty in complying with the new regulations. It has already been pointed out by a spokesperson at the Center for Automotive Research in Ann Arbor, Michigan that some of these companies may opt to pay fines rather than shift production of heavy componentry such as engines and transmissions. US domestic manufacturers are much more likely to welcome the new arrangements with Ford president Joe Hinrichs having already announced his approval.

Instead of a so-called ‘sunset clause’ limiting the agreement to five years unless all the signatories agreed to renew it, there will now be a 16-year deal with the possibility of review and renewal after six years. Canadian-built vehicles may still be subject to threatened 25% tariffs but these will only apply above exports of 2.6 million vehicles a year, a number which is way above what Canada currently achieves.

Whilst welcoming the new agreement, I find myself wondering what has really fundamentally changed. The deal smacks of cosmetic tinkering rather than any really radical new thinking. However, at least the agreement has been reached. Now for Brexit.

Sam Ogle

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