NAFTA is dead, long live USMCA; steel, aluminum tariffs continue

by | Oct 1, 2018 | 0 comments

The words that many in the business community had been waiting for over the past 14 months arrived late last night: “Today, Canada and the United States reached an agreement, alongside Mexico, on a new, modernized trade agreement for the 21st Century: the United States-Mexico-Canada Agreement (USMCA),” said the joint statement from Canada and U.S. negotiators.

Markets met the news with relief: the Canadian dollar, the Mexican peso, U.S. stock futures and many share markets gaining on Monday.

While the name change from NAFTA was expected, U.S. president had declared it a slur, the new agreement builds largely on the preceding NAFTA framework in important ways.

For the automotive sector, it continues the tariff free status in any real sense, and adds a boost to North American original equipment parts manufacturing with a ramped up requirement for North American content—to 75% from the current 62.5%–over the next five years.”

At this time, however, tariffs on steel and aluminum remain in place. The thinking among observers on this front is that time simply ran out to negotiate an end to those tariffs, but that they will be dealt with separately over the coming weeks and months. Continuing those tariffs in the face of the new agreement does seem to be antithetical to their purpose and justification, hence the thinking regarding a separate agreement.

However, U.S. steel and aluminum suppliers have enjoyed a windfall of sorts as the increased cost of imports has allowed them to increase their prices and still have a competitive advantage.

The joint statement from United States Trade Representative Robert Lighthizer and Canadian Foreign Affairs Minister Chrystia Freeland continued: “USMCA will give our workers, farmers, ranchers, and businesses a high-standard trade agreement that will result in freer markets, fairer trade and robust economic growth in our region. It will strengthen the middle class, and create good, well-paying jobs and new opportunities for the nearly half billion people who call North America home.

“We look forward to further deepening our close economic ties when this new agreement enters into force.

“We would like to thank Mexican Economy Secretary Ildefonso Guajardo for his close collaboration over the past 13 months.”

The final reference is a strong recognition that pressure from Mexico tipped the balance in favour of continuing with the trilateral deal, a point that had been called into question often by the U.S. president.

While details on the USMCA are still being released, here’s what we do know:

  • The U.S. has agreed to provide an “accommodation” to protect Canada’s auto industry in case the U.S. decides to impose tariffs on auto imports. A side letter published along with the main text of the agreement exempts a percentage of eligible auto exports from the tariffs. A similar agreement between Mexico and the U.S. preserves duty-free access to the U.S. market for vehicles that comply with the agreement’s rules of origin. In practice, this is expected to mean an exemption from tariffs for Canada’s auto sector.
  • The deal set a five-year transition period after the agreement enters into force for the regional value content requirement for autos to increase to 75%, from a current 62.5%.
  • The USMCA requires 40% of vehicles value to be made in high wage areas paying $16 an hour, requiring significant automotive production in the United States and Canada.
  • The deal also requires that 70% of steel and aluminum used by vehicle manufacturers be sourced from within the three countries.

 

 

 

 

 

 

 

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