USMCA crashes the car

Excerpted from an analysis of the U.S.-Mexico-Canada trade agreement, released Tuesday by Jeffrey J. Schott at the Peterson Institute for International Economics.

Contrary to President Trump’s

claims, the new pact moves backwards in this critical regard and imposes new restrictions that will impede regional trade and investment, stifling the potential for economic growth. On autos, the deal is innovative in a perverse way: It is the first free trade agreement (FTA) negotiated by the United States that raises rather than lowers barriers to trade and investment. It adds layer upon layer of costly new regulations that producers must follow to qualify for NAFTA’s low tariffs — layers virtually certain to drive up costs of autos for consumers and very likely reduce U.S. jobs in the auto sector. Very simply, the pact is intentionally designed to mismanage the auto sector, an important driver of production and high-wage manufacturing employment in all three countries. Based on analysis by the Peterson Institute for International Economics (PIIE), the new content rules and minimum wage requirements will likely lead to a less competitive North American auto industry with less investment in U.S. plants and fewer U.S. jobs in the sector — just the opposite of the claims of U.S. officials. The new rules require that 75 per cent of a car or truck have content made in North America to qualify for tariff-free imports, up from current level of 62.5 per cent. In addition, 70 per cent of steel and aluminum must be produced in North America, and 40 per cent a car or truck would have to be made by workers earning at least $16 per hour, presumably to discourage companies from moving assembly operations to Mexico. Producers of passenger cars must either comply with the new rules or forgo the regional tariff preference. This will likely be their choice, since in that case they can use components from any country and simply pay the low most favored nation (MFN) tariff of 2.5 per cent instead of rejiggering their supply chains. But truck producers don’t have that relatively cheap escape hatch: The U.S. MFN tariff on trucks is 25 per cent.

As a result of these provisions, the cost of producing vehicles in North America will go up at a time when auto sales in the United States are slumping already.