The Trump administration calls the new trade agreement with Canada and Mexico the “USMCA,” for U.S.-Mexico-Canada Agreement. That’s fine. President Donald Trump has made clear his disdain for NAFTA and his desire to replace it. But a better name for this new agreement would be “N Triple A”: North American Auto Agreement.
By far, the heart of the agreement is its far-ranging provisions by which the president seeks to compel automakers into shifting more production into the United States. Many uncertainties surround how carmakers will respond, what market conditions may result and how the industry’s long-term competitiveness against lower-cost foreign competitors will be affected.
The immediate bottom line, in any case, is positive, because of the overall result from the Monday announcement: The Trump administration did not scrap NAFTA without a workable substitute. Such a situation would have short-circuited countless economic and legal provisions linking the three countries. That possibility of major economic disruption rightly worried U.S. agricultural producer groups and manufacturers over the past year as trade negotiations dragged on amid sometimes strident rhetoric from the president.
Instead, after down-to-the-wire jostling between U.S. and Canadian negotiators last weekend, the three countries had good news that could be summed up in one word: stability. The new agreement, with the major exception of the auto provisions, involves relatively few major changes from the Clinton-era trade agreement. Some adjustments, on intellectual property and financial services, are sensible and constructive. Others, such as the small opening of Canada’s dairy market to U.S. producers, are modest.
U.S. negotiators, to their credit, helped the negotiations by ultimately agreeing to compromise on or jettison some U.S. proposals that the Canadians emphatically opposed as deal breakers. A key example was the resolution process to handle specific trade disputes.
The agreement, exceeding 1,800 pages with follow-up negotiations still ahead, amounts to a far-ranging government invention in the operations of the U.S. auto sector. This “N Triple A” presents carmakers with big decisions to make in adjusting their global supply chains. Multiple provisions insisted on by the Trump administration aim to restrict U.S. carmakers’ ability to base production in lower-wage Mexico, and to use foreign auto parts as part of the production process. But there’s also a possibility that automakers would maintain much of their current production practices and risk U.S. imposition of financial penalties.
Either way, economists agree, the agreement means an increase in U.S. vehicle prices. An additional factor raising auto prices are the hefty tariffs the Trump administration is maintaining on imports of foreign steel and aluminum, inflating the input costs for U.S. industries. The CEO of Ford says the tariffs will increase his company’s manufacturing costs in 2018 and 2019 by $1 billion.
It’s good news that the three North American governments can maintain their basic economic connections. But how this agreement will turn out for the auto sector is far from clear. At this point, the one thing certain is higher costs for U.S. car buyers.