USMCA details emerge alongside a picture of the future

Since starting out on the campaign trail, Donald Trump has made renegotiating trade deals a central part of his agenda. In his view, rebalancing trade agreements is central to his goals of returning lost manufacturing jobs to the US, creating commercial disincentives to the continued outsourcing of manufacturing overseas and stimulating job growth in industries that have seen decline in recent years.

The announcement in late September 2018 that Canada, Mexico and the US had agreed to replace NAFTA with the United States, Mexico and Canada Agreement (USMCA) is part of Trump’s plan to push forwards his agenda. The new Agreement contains provisions that affect several logistics intensive industries, including automotive manufacturing.  


Most prominent amongst these is automotive manufacturing, with new rules that incentivise production of cars and trucks in countries that pay higher wages, and from the US perspective also stop further shifts or loss of manufacturing activity to lower cost locations in Canada and Mexico. Two automotive-specific provisions within the USMCA have potentially significant effects on the sector.

The first provision increases the threshold at which vehicles made in the region qualify for tariff exemptions. Under NAFTA, 62.5% of the parts which made up a car had to be manufactured in the region to qualify, but USMCA ups this to 75%. The change should see and increase in production within the region, at the expense of imported parts – vehicle manufacturers will be less able to source parts from China, South Korea, Germany or Japan for assembly in Mexico, for example.

The second provision mandates that, by 2023, at least 40% of a vehicle be made by workers earning at least $16 an hour if it is to qualify for tariff exemption. This provision is directly aimed at stopping the flow of jobs from higher wage locations in the US to lower cost locations in Mexico. The average hourly wage at automotive manufacturers in the US during June 2018 was $22, but the $16 threshold is about triple the average hourly wage in Mexico. Significantly, though, the $16 figure is not linked to inflation, and by 2023 will be less of a burden to manufacturers in Mexico. 

Also included in USMCA are provisions that grant Mexico and Canada expanded access to the US passenger vehicle market. Side Letters to the agreement grant exemptions from future US tariffs on 2.6m imported passenger vehicles from each country. The 2.6m figure is a little more than the total Mexico exported to the States in 2017, and close to 1m than Canada’s total.

Wider indications?

The USMCA must still be ratified by the US Congress and as well as the legislatures in Canada and Mexico, but leaders of all three nations expect to sign the agreement before December. The Agreement is significant in and of itself, notably for the future of North America’s automotive manufacturing market, but is perhaps at least as significant for the indicators it offers for the (re)negotiation of other trade deals the Trump administration has prioritised. Wage thresholds, raising import duty levels and aggressive access to previously closed off markets are prominent signals other countries are likely to pay attention to. More subtle but perhaps more significant, though, is the that the USMCA largely prohibits the restriction of business-related data flows across borders, and effectively bans any of the countries involved from requiring companies to locate data storage or computing infrastructure within its borders. China has practically made such practices a condition of doing business in the country, and with ever more global and connected supply chains emerging, such provisions are likely to have increased relevance for logistics service providers in coming years.

Source: Transport Intelligence, October 9, 2018

Author: Nick Bailey


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