Commentary & Voices
United States-Mexico-Canada Agreement
Friday November 30, 2018
This morning in Argentina, President Trump was joined by the presidents of Mexico and Canada in the signing of an update to the North American Free Trade Agreement. With approximately 4 million vehicles built in Canada and Mexico sold in the U.S. in the past 12 months, automobiles are a headline issue in the new agreement. Below you will find initial commentary from the Cox Automotive Industry Insights team. If you would like to speak to one of our experts, please don’t hesitate to reach out. We’d be happy to help.
Jonathan Smoke, Chief Economist, Cox Automotive
Nearly a quarter of all new vehicles sold in the U.S. are assembled in either Mexico or Canada. And given decades of supply chain evolution based on NAFTA, a substantial portion of the vehicles assembled within the U.S. are dependent on components from Mexico and Canada. With tweaks in labor costs and content rules, costs—and therefore prices—will likely go up as this agreement becomes law.
The remaining wild card here is the Section 232, which not only would apply to the roughly 23 percent of vehicles imported into the U.S. from outside of North America, it would also serve as the basis for the penalty for any vehicles that fails the new USMCA content rules. That’s one of the two reasons we believe President Trump will continue to pursue 232, with the other reason being a threat to pressure China, Europe, and Japan into better deals.
The USMCA won’t lead to major shifts in the existing production and supply chain for the industry, and that’s a good thing. But it will prevent substantial movement away from North America and the U.S. in the future because of the added rules and the potential of a higher Section 232 penalty.
Charlie Chesbrough, Senior Economist, Cox Automotive
This is another important step forward in this process, although formal legislative approval by all three countries is still needed and, of late, nothing is guaranteed. Once finally approved, it will be good news for the automotive industry as longer-term strategic sourcing and manufacturing planning in the region can finally resume. However, with the steel and aluminum tariffs still in place, trade issues are still having a negative effect on auto maker profitability.
Michelle Krebs, Executive Analyst, Autotrader
The good news for the auto industry is that forward progress is being made, with a long-term horizon of 16 years. While we won’t fully know until the pact receives legislative approval, the new agreement seems to mostly supports the status quo and won’t force any substantial shift in the established North America manufacturing footprint. Considering announcements made this week by both General Motors and Ford, it’s clear major U.S. automakers are still struggling with production and capacity issues. This new agreement won’t change that fact.