The U.S.-Mexico-Canada Agreement eases uncertainty about the Trump administration’s trade policies, helping auto makers move forward with factory investments
DETROIT—The new trade agreement struck Sunday night between the U.S. and Canada eases uncertainty in the U.S. auto industry about the Trump administration’s trade policy, helping car manufacturers to move forward on factory investments with greater clarity.
The tentative pact, which Congress must approve, spares auto makers from costly tariffs on cars imported from Canada and Mexico, a major relief for an industry that has for more than two decades relied on duty-free trade to expand operations in North America.
But the new rules could also force car companies and their parts makers to alter their supply chains, potentially increasing costs when profit is under pressure from slowing new-car sales in the U.S., industry officials and consultants say.
The deal reached with Canada moves President Trump a step closer to cementing a new trade deal that will replace the North American Free Trade Agreement established more than two decades ago.
The new deal is a big win for Detroit’s Big Three auto makers, which rely heavily on their factories in Canada and Mexico to build cars and trucks for the U.S. market and are less exposed to the new rules than foreign-based rivals because many of their vehicles already meet the stiffer requirements, some industry analysts say.
The new tricountry pact—officially to be called the U.S.-Mexico-Canada Agreement, or USMCA—overhauls the rules for auto trade in the region, requiring auto makers to build a greater portion of a car in North America and with higher-wage workers to avoid duties when crossing borders in the region.
The accord will also exempt as many as 2.6 million vehicles imported annually from Canada and another 2.6 million made in Mexico from a proposed 25% tariff now under consideration by the Trump administration on foreign-built cars sold in the U.S., according to drafts posted to the website of the U.S. Trade Representative.
General Motors Co. GM -2.63% applauded the accord, saying it has long supported efforts to modernize the existing free-trade pact among the three countries. “This agreement is vital to the success of the North American auto industry,” the auto maker said. Ford MotorCo. F -1.29% also said it supported the deal, while Fiat Chrysler Automobiles FCAU -0.61%NV didn’t immediately return requests for comment.
Stock prices of those companies rallied in trading on Monday in New York, with GM rising 1.6% to $34.20 a share, Ford gaining 0.8% to $9.32 and Fiat Chrysler surging 2.7% to $17.99.
Lobbyists for all three of the Detroit-based auto makers applauded the deal and the Alliance of Automobile Manufacturers, a trade group representing 12 of the largest American and foreign-brand auto makers, called the pact an “encouraging development.”
But representatives for some foreign auto makers said it would complicate operations for manufacturers whose vehicles aren’t compliant with the new requirements.
The leading U.S. labor union for the industry said it would “withhold final judgment” until the details of the accord are clearer, but United Auto Workers President Gary Jones noted it “could have the potential to provide some needed relief for America’s working families.”
Mr. Trump has repeatedly blamed Nafta for the loss of manufacturing jobs in the U.S. and threatened to terminate the quarter-century-old pact if he couldn’t reach a deal with Mexico and Canada that is more beneficial to the American worker. The trade dispute has left the auto industry bracing for the worst and prompted some manufacturers to hold off on making investments in the region until the negotiations could be resolved, some analysts and manufacturing experts say.
“The specifics on the new agreement will put uncertainty to bed and the industry will know the rules and how to play by them,” said Jeff Schuster, president of global forecasting at research firm LMC Automotive.
About 4.1 million cars and trucks were imported from Canada and Mexico last year, representing nearly a quarter of all new vehicles sold in the U.S. in 2017, according to LMC Automotive. That falls well short of the 5.2 million vehicles exempted under the new trade deal, a cap that doesn’t include light trucks such as most pickups.
It is unlikely Canada will exceed its 2.6 million vehicle-export threshold anytime soon, said Flavio Volpe, head of the Canadian Auto Parts Manufacturers’ Association, noting that would require the “investment equivalent of three new production plants that sell exclusively to the U.S.”
The establishment of Nafta in 1994 was a major victory for the auto industry, which used the free-trade pact to re-source U.S. factory production, particularly on lower-priced small cars and compact sedans, to Mexico to take advantage of the cheap labor. Auto-parts suppliers followed, building new factories along the U.S.-Mexico border and near the car-assembly plants, making the country integral to the industry’s supply chain.
More recently, much of the new auto investment in North America has flowed to Mexico, with many foreign auto companies constructing factories to use as export hubs to the U.S. and other markets globally—a trend Mr. Trump has been trying to reverse.
The tentative deal for North America would require at least 75% of a car’s value be produced from parts and material made in the region, up from 62.5% under the current agreement. Car companies would also have to ensure 40% to 45% of the vehicle is made by workers earning at least $16 an hour, a provision aimed at steering more work to the U.S. to generate manufacturing jobs. Vehicles that don’t meet the new rules will be subject to a 2.5% tariff.
Some industry analysts, however, don’t anticipate the new accord will result in a windfall of new U.S. auto-factory jobs because a 2.5% tariff is still too low to compel car companies to relocate assembly-line work.