May kicked off with a bundle of trade deals going into hibernation mode. After some legitimate — albeit quaint — progress, NAFTA decided to take a break this week. Currently, U.S. Trade Representative Robert Lighthizer is in China to circumvent that brewing trade war and is unable to commit himself to the North American Free Trade Agreement’s renegotiation.
That’s probably fine, because Mexico’s auto reps need time to cool off.
The United States’ most recent proposal for increasing NAFTA’s regional automotive content includes a four-year evolvement to meet a 75-percent regional value threshold. It also suggests new labor rules requiring “substantial work” to be set at wages of $16 an hour or more. The move is intended to help the U.S. and Canada bolster production and force Mexico to raise its own wages.
A significant portion of Mexican trade officials aren’t keen on either aspect, resulting in a mixed response overall.
According to Reuters, industry groups aren’t celebrating the new proposal, either. Mexican Auto Industry Association president Eduardo Solis said the U.S. pitch was absolutely not acceptable.
“The percentage, the transitions, the restrictions. You have to understand the U.S. proposal is like putting padlocks on padlocks,” Solis said. “Imagine a car that does comply with the percentage, but doesn’t comply with all the core parts. Or you comply with core parts but don’t meet the steel and aluminum requirements. Or you comply with the first three but you don’t meet the wage requirements … It has the potential to influence investments, influence production in all three countries.”
The Center for Automotive Research in Ann Arbor, Michigan, estimates Mexican auto assembly workers average just below $6 an hour, with auto parts plant employees averaging under $3 an hour. Meanwhile, U.S. automotive employes average closer to $22 per hour and Canadians come in just shy of $20.
While the wage rules are ambitious, content requirements have been scaled back as a compromise. The previous overall regional value content proposal was set at 85 percent. But opposition from Canada, Mexico, and the automotive industry, resulted in U.S. negotiators scaling the plan back to 75 percent. The mandate is also no longer universally implemented. While certain high value parts (like engines and transmissions) would have to meet the 75 percent threshold, lesser parts would only be subject to today’s regional value threshold of 62.5 percent. Auto manufacturers would also need to purchase 70 percent of the steel and aluminum they use from North American suppliers.
The U.S. Alliance of Automobile Manufacturers has expressed concerns that the new deal could push business overseas.
Speaking of business overseas, let’s get back to Lighthizer’s trip to The People’s Republic. President Donald Trump’s 25 percent tariff on steel exported to the U.S. has really rattled China’s cage — despite the country not sending much of it to America. We’re not sure if the strategy, which also includes a 10 percent tax on aluminum, was boldly brilliant or totally insane. But it appears to have worked in getting China’s attention, in addition to other import tax proposals.
The country has since promised to open up the Chinese financial sector, purchase more natural gas from the U.S., lower its own tariffs, and allow foreign companies complete ownership of their own businesses after 2022. Lighthizer and company will be tasked to find out if these offerings are more than empty promises.
Still, the tariffs have caused a backlash abroad. The European Union threatened to retaliate if steel and aluminum tariffs took effect by imposing import levies on politically targeted American goods. The United States has been scrambling to cut amenable deals with allied nations. While the White House doesn’t want to alienate the countries it depends on, the president insists he wants to put an end to decades of unfair trading practices with foreign nations.
As a result, the Trump administration announced it has decided to stall most of its tariffs on imported steel and aluminum until at least June 1st. South Korean officials have already received a permanent exemption the tariffs as part of an updated free trade agreement signed in March. Australia, Argentina and Brazil also appear to have reached an agreement that would avoid import fees. Talks are progressing with Canada, Mexico and the European Union.
Japan, already subjected to the tariffs, remains committed to maintaining positive relations with the United States. While a major exporter of steel, most of Japan’s carbonized iron goes to Asia. What does make it into America is often of a high grade and the island nation feels confident the U.S. will take that into consideration when handing out tariff exemptions in the future.
We’re not entirely sure what the long term strategy is. For the most part, the biggest impact these metal levies have had on domestic car production comes from German manufacturers concerned the deal could mess with auto assembly in the Southern states. Everyone seems worried about a trade war but, thus far, one hasn’t manifested.