As hostilities about the impeachment process continued, a moment of bipartisanship came together in Washington Tuesday. Democrats announced their support for the United States-Mexico-Canada Agreement – or USMCA. The new trade deal could have significant implications for U.S. auto manufacturers.
USMCA is designed to replace the North American Free Trade Agreement. NAFTA went into effect in 1994.
Kristin Dziczek is a vice president at the Center for Automotive Research in Ann Arbor. From her perspective, one of the biggest benefits of NAFTA has been the creation of an integrated supply chain in North America where the three countries build cars together. That means parts cross borders multiple times without being subject to tariffs.
“It’s allowed the United States to have a much more competitive auto industry in the world,” Dziczek said.
The final version of the USMCA hasn’t been released, but many details about the agreement have been made public. Currently, if 62.5% of a vehicle is made in Canada, Mexico, or the U.S., it is exempt from tariffs. Under USMCA that jumps to 75%.
According to Dziczek, that change would benefit General Motors, Fiat Chrysler and Ford the most, but Honda and Toyota are also in a good position to comply because they manufacture many vehicles in the U.S. with North American parts.
Under the new rules, nearly all of the auto parts must come from North America.
“This is a much more modern and broadly encompassing ... way to count the content of a vehicle,” she said.
Another requirement for the auto industry is that by 2023, at least 40 percent of vehicle content must be made by workers earning at least $16 per hour. That's likely to mean that larger, expensive components, including engines and transmissions, will have to be made by people working at the higher wage.
“It’s effectively a peg that it it has to be made in Canada or the United States,” Dziczek said. “They can still produce vehicles in Mexico and meet that rule, and that might mean that there’s a little more automation in order to get those wages higher.”
Dziczek says in the long-term the deal may not be viewed as s significant shift for the auto industry, but in the short term, it provides some much-needed certainty after a few years of speculation.