LOOKING AT THE GOOD, BAD AND THE UGLY OF NAFTA 2.0
USMCA pact likely to boost car costs while protecting Canadian jobs
Dennis DesRosiers is the best — and if you read his company’s bio, the only — research consultant in Canada whose sole focus is the automotive market.
And since he’s been analyzing the automotive market since 1985, he knows a thing or two about the North American Free Trade Agreement (which came into force in 1994).
Here’s his top-of-the-napkin take on the automotive portion of the new United States Mexico Canada Agreement (USMCA). Any details omitted are mine; any insightful conclusions are his.
DesRosiers’ most important conclusion about the new USMCA agreement — like that of pretty much anyone who has analyzed NAFTA 2.0 — is that, while flawed, it is so much better than any of the alternatives. Indeed, DesRosiers says he “breathed a sigh of relief ” when he found out “his” industry — for that’s the way he feels about Canada’s automobile manufacturing business — would not be subject to a 25 per cent tariff.
Of course, we could have held out for a better deal … if you were willing to wager the health of Canada’s most important industry on the possibility that Robert Lighthizer’s hard-line negotiation tactics were just another one of Donald Trump’s bellicose bluffs.
But with one in seven Canadian jobs directly or indirectly dependent on the auto business, that would have been suicidal. Suffice to say, DesRosiers’ relief was shared by one and all in our automotive sector.
Understanding why some form of agreement is so important to all of North America’s auto industry, says DesRosiers, is a simple lesson in history and basic economics.
Before the Autopact — NAFTA’s automotive predecessor — was signed on Jan. 16, 1965, North American sales totalled 12 million cars. By 1989, when the original FTA — between Canada and the U.S. only — was put into place, automotive sales had risen to 17 million.
Ownership had grown to over 70 per cent of those of a “driving age.”
NAFTA only expanded that market. North American sales — now with Mexico in the mix — are 25 million (with 40 million used cars also changing hands) and almost 70 per cent of them — 17 million — are produced here. Meanwhile, fully 80 per cent of the driving age population now own a car.
And, while he acknowledges that population growth, urban sprawl and increased affluence have all contributed to that incredible penetration rate, DesRosiers contends that the fundamental reason the automotive market has grown so dramatically is that cars are so (relatively) cheap.
Trump may target his base with tales of wages suppressed by free trade, but the corollary is that cars, when you factor in all the advanced safety, emissions and comfort features the modern automobile has, are extremely affordable.
The reason for this is that the very globalization that the American populist movement rails against has also, says DesRosiers, taken “billions and billions in cost out of the sector.” Adjusting for content and the larger vehicles we now buy, DesRosiers estimates that inflation of automobile MSRPs has averaged about one per cent per year since the signing of theses free trade agreements. I think he’s being generous.
In some cases, the real cost of a new car — I just drove a 1996 Nissan 300ZX Turbo, which in today ’s dollars, would cost almost exactly the same as a top-of-the-line Porsche 718 Cayman GTS today — has actually decreased. DesRosiers says the reason for this boom is simple market economics.
“Whenever ‘any’ good becomes not only less expensive but more technologically advanced and higher quality, consumers tend to buy more, not less,” he says.
NAFTA may or may not have been good for autoworkers, but it has been great for consumers.
As to whether NAFTA has actually been bad for workers, DesRosiers asserts that there are now 750,000 to 850,000 Canadians employed directly by the automotive industry.
That includes all the mould-and-die makers that build the machinery that manufacture parts and the assembly-line workers in those parts manufacturers, as well as those who assemble the automobiles, not to mention those in distribution, retail and finance. That is three times more than were employed in 1965. The same holds true south of the border.
Indeed, as for why the U.S. administration made such a hullabaloo about domestic content, DesRosiers — like many who’ve analyzed some of the claims of workers wronged emanating from the U.S. — is somewhat baffled.
He contends some cars built in Canada actually have more American labour content than Canadian.
That’s because, while Canadian workers may be assembling the final vehicle, that contributes just five to eight per cent of the cost of producing the vehicle.
Component labour — i.e. building the parts — account for up to 30 per cent of production costs and, as DesRosiers contends, that still mostly comes from U.S. suppliers. This factor is so important, says Canada’s leading — and only! — full-time automotive analyst, that if the entire free trade deal had been scrapped, two U.S. autoworkers would have lost their jobs for every Canadian worker who was turfed. As for details of how NAFTA 2.0 will specifically affect Canadian auto manufacturing and exportation to the U.S., a few points stand out.
First and foremost is the fact USMCA allows Canada to send 900,000 more vehicles per year to the U.S. That’s a more than 50 per cent increase over the 1.7 million we currently export south of the border, not a number we’re likely to see in my lifetime, let alone in the span of this 16-year agreement.
So much for all that tough American negotiating (my words, not DesRosiers’). And forcing Mexico to agree to a US$16-an-hour wage for a higher proportion of its autoworkers can only make Canadian plants more competitive.
Both more than offset the possible negative effects of boosting minimum North American content from 62.5 to 75 per cent. Indeed, the most commonly agreedupon effect of this clause, like much of this new agreement, will be to increase the price of cars sold anywhere in North America.
Yet, another “win” for the 45th president.