Government negotiators have finished crafting the U.S.–Mexico-Canada Agreement (USMCA) which replaces the North American Free Trade Agreement (NAFTA) and now the parties that will be impacted by the new agreement get their turn.
The signing last November marked the formal conclusion of more than a year of trilateral haggling that produced the USMCA but before the agreement can take effect, it has to win ratification in Congress where Democrats have a majority in the House as of January, 2019.
The original 1994 pact will remain in effect until the new one is ratified, but uncertainties abound and tariffs on steel and aluminum continue to be a major problem.
Some industry observers say the time lag will give detractors and supporters the chance to review how the provisions will be carried out and enforced, and even though the agreement is signed, how they will affect businesses. The pact will go through “implementing legislation” to make it fit with U.S. laws, and through statements that the Trump administration is required to provide Congress explaining how the agreement will be monitored and enforced.
“I think it won’t have any problems passing in Canada or Mexico,” says Kristin Dziczek, vice president, industry, labor and economics, at the Center for Automotive Research in Ann Arbor, Michigan.
“The problems in the U.S. in the Congress are not just about the continuation of the steel and aluminum tariffs, but also concerns that Democrats in the House may share with the United Auto Workers and the AFL-CIO about the content not being high enough and the labor provisions not being stringent enough.
“So while many argue that it raises the costs of vehicles in the U.S. and in North America, The AFL-CIO and the UAW have essentially made their positions known. They are concerned that enforcement mechanisms are not there and with the labor value content rule at $16 an hour, you can average your way to getting over that threshold and that it is not really a binding rule,” Dziczek says.
According to an analysis by The Washington Post, “This agreement stipulates that at least 30 percent of cars (rising to 40 percent by 2023) must be made by workers earning $16 an hour, about three times the typical manufacturing wage in Mexico now. USMCA also stipulates that Mexico must make it easier for workers to form unions. The AFL-CIO is cautiously optimistic that this truly is a better deal for U.S. and Canadian workers in terms of keeping jobs from going to lower-paying Mexico or to Asia, although labor is looking carefully at how the new rules will be enforced. It’s possible this could accelerate automation, but that would take time.”
The Post also says economists and auto experts think USMCA is going to cause car prices in the United States to rise and the selection to decrease, especially on small cars that used to be produced in Mexico but may no longer be able to be brought across the border duty-free. It’s unclear how much prices could rise, but automakers can’t rely as heavily on cheap Mexican labor now and there will probably be higher compliance costs.
With the signing, “the whole region becomes a good basis to invest in the car industry,” Jesus Seade, the NAFTA negotiator for Mexico’s president Lopez Obrador, said in an interview with Bloomberg Television last November. “The car industry is the most important part of the agreement; it’s where most of the trade takes place. There will have to be more investment by Toyota, Honda, Mercedes, and the Germans and Koreans. That can go to all three countries in different ways.”
Steel and aluminum tariffs on Canada and Mexico, once seen as a pressure tactic in trade talks, remain in place and pose another roadblock for the USMCA’s approval in Congress, according to Politico.com.
Lawmakers on both sides have expressed displeasure that the duties remain in place despite the new deal, with American industries and agriculture still taking hits from the two U.S. neighbors’ retaliatory tariffs on more than $15 billion worth of U.S. goods.
“If you’re trying to whip votes, you’d take advantage of the opportunity to lift that instead of leaving an irritant on the table,” a former United State Trade Representative told POLITICO. “It’s going to make [administration officials’] lives harder to get Congress on board as constituents are complaining a lot” about the harm of the ongoing tariffs.”
Senator Ron Wyden, D-Ore., the ranking member of the Senate Finance Committee, issued a statement shortly after the USMCA was signed on November 30, 2019 indicating that he still has some concerns about the negotiated agreement.
“Over the coming months I will push to see that these concerns are addressed before Congress considers this proposal,” he said at the time. To implement the USMCA, a majority in each chamber of Congress is required to pass the law. As a result of the mid-term congressional elections in November, the president will need bipartisan support to obtain that majority.
Matt Blunt, president of the American Automotive Policy Council, issued the following statement following President Trump’s signing of the USMCA: “We appreciate the administration’s continued efforts to modernize our nation’s existing trade agreements and help grow U.S. automotive manufacturing with new agreements like the USMCA. We commend the negotiators for crafting an agreement that keeps the United States and North American automotive manufacturing competitive and for including important provisions that require the acceptance of vehicles built to U.S. safety standards and address currency manipulation. However, we remain concerned that the continued imposition of steel and aluminum tariffs on Canada and Mexico will undermine the benefits of the USMCA. We strongly encourage the parties to come to a resolution and relieve the undue burden that has been placed on U.S. manufacturers.”
Meanwhile, as the USMCA agreement inches along, there remains the question of exactly how the US – China tariff spat will impact the auto industry.
According to Forbes.com, “Motor vehicle exports bound for China, the second-largest market after Canada, fell $599.29 million from the previous August. Unlike with soybeans and oil, where the decline was more precipitous, the 55.65 percent drop in August was preceded by a $296.16 million, 46.69 percent drop in July, and a $506.30 million, 50.32 percent decline in June.”
China announced in December a 90-day suspension of tariff hikes on $126 billion of U.S. cars, trucks and auto parts following its cease-fire in a trade battle with Washington. The suspension is China’s first step in response to Trump’s Dec. 1 agreement to suspend U.S. tariff hikes for a similar 90-day period while the two sides negotiate over American complaints about Beijing’s technology policy and trade surplus. Beijing was expected to suspend a 25 percent import charge on $66 billion of cars and trucks and a 5 percent charge on $60 billion of auto parts, effective Jan. 1, the Finance Ministry announced.
Here’s a quick rundown of the procedure the deal would have to go through, according to BusinessInsider.com:
Within 60 days after the deal is signed (Nov.30): The Trump administration must notify Congress of necessary changes to U.S. law that need to be made to enact the deal.
Within 150 days after the deal is signed: The US International Trade Commission must release a report on the economic impact of the deal.
At least 30 days before the deal is formally submitted as a bill to Congress: The text of the implementing legislation must be released.
The bill is considered by committees in the House and Senate and voted on: The implementing bill would start in the House and be passed in a matter of days or could take months, depending on Congress’ wishes.
At this point, it is likely that a “mock markup” bill will be submitted to the House Ways and Means Committee and the Senate Finance Committee, to allow for non-binding input from these committees. Once the text of the bill is finalized, it will be introduced in the House of Representatives, and then must pass through both houses of Congress with a simple majority. The President can then implement the agreement via proclamation, including the date the agreement is to come into force.
Update: On Feb. 26, 2019 a coalition of 200 organizations, representing manufacturers, farmers and others, came together to lobby Congress to approve USMCA. Included in the USMCA Coalition according to POLITICO, are the U.S. Chamber of Commerce, Business Roundtable, National Association of Manufacturers, American Farm Bureau Federation and Fiat Chrysler Automobiles, along with Citi, Cargill and UPS.