Trump’s NAFTA agreement is a roadmap to higher car prices, analysts predict
If U.S. President Donald Trump’s more stringent NAFTA deal with Mexico comes into effect, cars are going to get more expensive in the United States, and almost certainly here in Canada, too.
Under the proposed deal, rules of origin for auto parts will require that 75 per cent of a vehicle must be made in the U.S. or Mexico, compared to the current 62.5 per cent NAFTA threshold.
That could mean that a carmaker would have to source brakes or windshield wipers from a North American supplier instead of buying cheaper parts from Asia, and those higher costs will be passed on to consumers.
Similarly, the requirement that 40 to 45 per cent of a vehicle must be made with labour earning at least US$16 per hour imposes another cost on manufacturers, which will also be passed on to consumers.
Every expert who spoke to the Financial Post for this story was careful to note that the full deal has not been publicly released, and negotiations are still underway. And even based on the broad strokes that have been confirmed, several sources expressed serious skepticism that current U.S.-Mexico agreement would be ratified by the U.S. Congress.
Chad Bown, senior fellow with the Peterson Institute for International Economics, didn’t mince words in his analysis of the deal.
“Trump’s success at bullying another country to accept a mutually bad trade deal is not an economic achievement,” he wrote. “Foreign politicians may appease the White House to avoid a worse outcome. But that should not be confused with good policy.”
Speaking to the Financial Post, Bown said that rules of origin are the thorny core of the deal, with policy-makers trying to set rules to maximize the local economic benefits within the free trade zone without squeezing companies so tightly that they decide to simply ignore the rules because it’s cheaper to make things elsewhere and pay the resulting tariffs.
“These are really hard calculations to do even if you have all the information in front of you,” Bown said.
“And if you get it a little bit wrong, it can go in the complete opposite direction on you, which then triggers your need to do a whole lot of other things.”
Currently, car manufacturers face a 2.5 per cent import tariff if they fail to conform with NAFTA’s requirements, and they frequently calculate that it’s cheaper to pay the tax rather than complying with the NAFTA rules.
Sometimes that means making cars in Asia, but in other cases, it means sourcing parts from all over the world and then making cars in Mexico and forgoing the benefits of NAFTA.
But a “side letter” agreement between the U.S. and Mexico hints at what might come next.
The letter reportedly guarantees Mexico can send 2.4 million cars to the U.S. before it would be hit with tariffs of up to 25 per cent on the grounds of national security, which the Americans have said they are considering.
The exemption is important because it stands to preserve the status quo for Mexican manufacturers. It also reportedly means that even non-conforming vehicles below that threshold would only be subjected to a 2.5 per cent tariff.
“That’s probably the most important single thing in here, rather than some of those rules of origin,” said Avery Shenfeld, chief economist for CIBC Capital Markets.
“In effect, what Mexico is agreeing to is we can keep what we have now, but we’re putting a cap on our growth … if the U.S. does go ahead with a big tariff on foreign-made vehicles.”