Industry Outlook: US-Canada-Mexico trade agreement unlikely to be approved by Congress this year

Auto industry awaits decision on Section 232 tariffs on vehicle-related imports

The ratification of the United States-Mexico-Canada (USMCA) treaty, the new NAFTA, is a
done deal in Mexico, well on its way in Canada, but in the United States? Not so fast. Most think tanks consider it unlikely that the new treaty will be approved by the U.S. Congress in
2019, given the complicated process of approval, Congressional recesses and partisan fighting.

USMCA – The United States Mexico Canada Agreement Treaty.

Christopher Sands, senior research professor and director of the Center for Canadian Studies at Johns Hopkins University, writing on, says, “It is unlikely, but not impossible, that the 116th Congress will approve legislation implementing the United
States-Mexico-Canada Agreement (USMCA) in 2019.”

While President Trump’s threat to impose a 5 percent tariff on all Mexican goods, including autos, appears to be in the rear view mirror, auto industry observers say automakers are still concerned about Trump’s trade war with China, which supplies a wide range of car parts for use on American assembly lines and could cause hiccups in the North American auto industry supply chain. Likewise, the auto industry is awaiting a decision on whether proposed tariffs on auto imports from other countries are going to be imposed.

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Nadia Theodore, Consul General of Canada. Photo credit: Nick F. Nelson

The various trade battles come at a bad time for the auto industry. Sales are down more than 2 percent for the first five months of the year and are expected to decline to 16.9 million, marking only the second downturn since the end of the Great Recession. Nadia Theodore, Canadian Consul General for the Southeast United States in Atlanta who has a background in treaty negotiation, says of the new USMCA accord, “From Canada’s
perspective, it really is a very good news story for all three countries.

“The new agreement will insure that our companies continue to get duty-free access, for all NAFTA goods, and it of course maintains outcomes that NAFTA had in trading services and
labor mobility.

“It really reinforces the North American supply chain which enables Canada, the United States and Mexico to really compete as a regional bloc, against international competitors
and win. NAFTA, and now USMCA, is really what binds us together as a North American supply chain force. That allows our companies to compete globally against our international
competitors and win more times than we do not.”

Theodore says the Canadian government was looking for the United States to honor a commitment to remove the Section 232 tariffs on steel and aluminum it had levied on Canada and Mexico, which happened May 17. Section 232 of the Trade Expansion Act of 1962 authorizes the president to adjust specific imports from other countries if the importation “is in such quantities or under such circumstances as to threaten to impair the national security,” according to the Bureau of Industry and Security. “And we had said all along that once we got those tariffs on steel and aluminum removed, that one, Canada would eliminate our reciprocal tariffs that we had in place, vis-a-vis the United States, we would do that immediately, and then two, we would move swiftly to implement the
agreement in Canada,” she says.

“And so true to our word, two days after the United State removed the steel and aluminum tariffs against us, we eliminated the tariffs that were in place vis-a-vis the United States, and Bill C100, which is the act to implement the agreement, between the United States, States, Canada and Mexico, has been tabled in Canada in Parliament, and not only has it been tabled but it has received first and second readings in our House of Commons. The second reading has happened and so there is one more reading, the third reading, to take place, after which it will then go to our Senate for three readings, and then, once it has received those three readings in the Senate and the Senate and the House have passed the bill, it can go to the Governor General and then become law.”

Theodore says Canadian Minister of Foreign Affairs Chrystia Freeland has made it clear that she will move forward. The Canadian House adjourned in June 21 but Theodore says
Parliament can be recalled if necessary or warranted. “To me the treaty will continue the
positive impact on the auto industry. Again, the auto industry has benefitted from this supply chain and partnership that we have built in North America that has enabled them to compete and win,” she says.

“USMCA, in the auto industry in particular, we have actually strengthened rules of origin, and provided certainty for companies. So really with this new USMCA, it will really incentivize North American production and North American sourcing which will create well-paying jobs in all three countries. “We are talking about advanced manufacturing jobs that pay people a living wage, so really the new and strengthened rules of origin that we
negotiated that is part of USMCA is really going to be good news for the auto sectors in all three countries,” Theodore says.

Also, Mexican President Andrés Manuel López Obrador has announced he will summon Mexican senators for an extraordinary session and officially send them the text of the USMCA to begin ratification.

Mexican President Andres Manuel Lopez Obrador

Whereas Canada’s name for the USMCA is CUSMA, the Mexican government calls it the Tratado entre México, Estados Unidos y Canadá (T-MEC), which is Spanish for the Mexico-United States-and-Canada Treaty. Since Mexico regards it as a treaty, it only requires a simple majority approval from the country’s upper legislative chamber, the Senate of the Republic, in order to be ratified.

With Canada and Mexico officially starting the process for their respective ratifications of the USMCA, it probably will not be long before a USMCA Implementation Act is at least introduced in Congress. In June, U.S. Speaker of the House Rep. Nancy Pelosi, D-CA, named U.S. Rep. Terri Sewell, D-AL, to the House Democrats’ Trade Working Group, a task force that will be responsible for negotiating improvements to the USMCA. Sewell represents an area that includes or is near Mercedes, Honda and Hyundai assembly plants.

“The task force has a lot of work ahead of it, however, I am optimistic that we can work with United States Trade Representative Robert Lighthizer to ensure the new trade agreement grows the American economy, protects workers and strengthens our relationships with our neighbors,” Sewell says.

U.S. Rep Terri Sewell

Sewell, a member of the House Ways and Means Subcommittee, will collaborate with U.S. Rep. Rosa DeLauro, D-CT, on the enforcement capabilities in the trade agreement. Other representatives will tackle issues related to drug pricing, labor issues, environmental issues and more.

Sewell says that she was “honored” to have been named to the task force charged with “making tangible improvements” to the nation’s new trade agreement. In June Sewell and Jackie Walorski (R-IN) announced the House passage of a bipartisan amendment to the
Commerce, Justice and Science funding bill calling on the Trump Administration to release the Commerce Department’s Section 232 report on imported automobiles and auto parts. On May 17 the decision was delayed for 180 days. Under the policy, the secretary of commerce can conduct an investigation into whether a particular import threatens to impair national security. Inquiries can be initiated by interested parties, requested by a
department or agency head or selfinitiated by the secretary.

“It has been over four months since the Department of Commerce submitted their Auto 232 Report to the White House, and neither Congress nor the public has seen the report,”
Sewell says. “Unfortunately, I think I know why this administration will not share this report. It’s because the products hard-working Americans in the auto sector design, build, sell and service are not a threat to our national security. The auto workers in my district are terrified that any day President Trump could announce tariffs that would threaten their jobs.”

Sewell has been an outspoken opponent of the Trump Administration’s proposal to
dramatically raise tariffs on auto imports. She led a bipartisan group of 159 lawmakers in a letter urging Director of the National Economic Council Larry Kudlow and President Trump against imposing costly new tariffs that could harm the auto industry. Sewell and others have filed bipartisan legislation to delay auto tariffs by requiring the International Trade Commission (ITC) to conduct a comprehensive study on the economic importance of automotive manufacturing in America before tariffs on automobiles and auto parts could be applied.

She is also the lead sponsor of the bipartisan, bicameral Trade Security Act, which would reform Section 232 to increase Congressional oversight in the Section 232 process and reassign national security threat assessments to the Department of Defense. The tariffs would deal a devastating blow to Alabama, where auto manufacturers are a powerful driver
of the local economy. Mercedes, Honda and Hyundai assembly plants have made the state a hub for car and light truck production. According to the Peterson Institute, if auto 232
tariffs were implemented and foreign countries retaliated, 624,000 jobs could be lost in the auto sector.

Last but not least are the trade tensions between the U.S. and China, and the impact on the U.S. automotive industry. Last year China increased the tariffs on U.S.-made automobiles entering the country from 15 percent to 40 percent in retaliation to U.S.
tariffs. China has since suspended the additional 25 percent tariffs on U.S. vehicles and auto parts as a goodwill gesture. If tensions should flare up again, however, China will likely hit the automobile industry with another round of tariffs.

That again would bring the complicated global automotive supply chain into play. What that means is U.S. producers would spend more on parts from China when they are taxed at a higher rate, which would result in somewhat higher prices for cars for American consumers.

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