How the US-Mexico-Canada Agreement (USMCA) is Influencing the Auto Sector

On November 30, 2018, at the G20 Summit, the U.S., Mexico and Canada signed the new United States-Mexico-Canada Agreement (USMCA) to modernize the 24-year-old North American Free Trade Agreement (NAFTA).

Shift From NAFTA to USMCA

The USMCA deal intends to replace the NAFTA and creates a modernized free-trade system among the three countries to address critical issues such as protection of intellectual property, harmonization of regulatory systems and e-commerce.

The USMCA changes some of the processes and rules with respect to certain goods that are traded within North America and devise the mechanism to resolve trade disputes.

Key Changes Under USMCA

The new deal is yet to see the light of day and the ratification of the agreement is likely to stretch into the second quarter of 2019. The are some major differences that are highlighted between NAFTA and USMCA:

Dispute Resolution

To begin with, NAFTA’s Chapter 11, the Investor-State Dispute System (ISDS), has been removed between the U.S. and Canada, but maintained between the U.S. and Mexico for certain instances. The ISDS was a mechanism that enabled private corporations to take legal action against a foreign government if it believes that the foreign government’s policies infringe on the corporation’s rights to engage in commerce in that country.

Plans to Revamp the Automotive Sector

Automobile manufacturing was a major point of the negotiations. Under the USMCA, a new labor value content rule was proposed, where a minimum of 40-45 percent of an automobile’s content must be produced using labor earning a minimum of $16 per hour. The system is intended to bridge the gap between labor rates in all three countries and ensure a level playing field with respect to labor in the automotive sector.

The other key highlights of origin and regional value content are:

• Under the net cost method calculation, USMCA requires a regional (North American) value content of not less than 75 percent to qualify for the zero-tariff benefit.
• At least 70 percent of an auto producer's steel, aluminum and glass purchases must be "North America-originating" for that producer's vehicles to qualify for USMCA duty-free treatment.
• The part content requirement will be divided into 75 percent core, 65 percent principal and 60 percent complementary parts.

The new system is not overly disruptive to the very complex supply chains of automakers and their auto parts suppliers, helping them make a smooth transmission.

The Other Side of the Story

The USMCA may lead to higher prices for consumers and more inefficiencies for businesses. Shifting away from a business model that depends on Mexican labor would lead to higher-priced cars for American consumers. The new agreement will make North America’s automakers less competitive compared with their European and Asian rivals.

Even if the new pact does help return some production to the United States, it’s unclear whether it would produce many jobs as America’s factories are increasingly automated.

The USMCA could shift more factory production to the United States, reversing a long-standing flow of jobs to lower-wage Mexico. Mexico is the prominent exporter of automobiles and auto components to the U.S. With additional duties imposed on Chinese automotive parts and no tariffs on Mexican cars, Chinese auto components suppliers will face more competition. Additionally, China buys huge quantities of automobiles and components from the U.S., but now with retaliatory tariffs imposed by China, Mexico would get the advantage, owing to increased prices while importing from the U.S.