New North American free trade deal important to Canada’s automotive industry
It came down to the wire, but last week’s agreement between Canada, the United States and Mexico was finally reached last week. The deal is very significant for the automotive industry and the economies in all three nations.
After more than a year of negotiations, the updated NAFTA agreement is called the United States-Mexico-Canada Agreement (USMCA), and while the devil will be in the details, Canada has escaped the threat of auto tariffs. At this point, we know the agreement requires a higher proportion of parts in a vehicle be made in areas of North America paying workers at least $16 an hour; not an issue in Canada, where workers are paid $20 to $29 per hour on average.
USMCA sets a five-year transition period after the agreement enters into force for the regional value content for autos (the percentage of the vehicle that must be manufactured in North America) to increase to 75 per cent from the current 62.5 per cent, to qualify for the duty-free movement of vehicles and parts across the three nations’ borders.
This could well create more opportunities, especially for Canada’s highly competitive vehicle parts manufacturers.
A wild card in this process is a side letter to the agreement that shows the U.S. preserved the ability to impose threatened 25 per cent tariffs on national security grounds.
However, under such a scenario, Canada and Mexico each agreed to a quota of 2.6 million passenger vehicles exported to the U.S., well above the current production level of about two million units in Canada, and thus safeguarding Canadian plants.
At present, Canadian-United States automotive trade is worth close to $150 billion a year. In B.C., the new car sector generated more than $16 billion in retail sales last year, and its share of retail sales is now 19 per cent, second only to food and beverage sales. The industry is also responsible for some 30,000 family-supporting jobs across the province.
On another cross-border matter, one that also has great significance, the Canadian Automobile Dealers Association recently prepared a report to advocate for a single North American set of vehicle-emission standards. Over the past decade, the automotive industry has demonstrated its commitment to environmental standards and invested hundreds of billions of dollars in efforts to increase fuel economy and reduce its environmental and carbon footprint. As a result, today’s new vehicles are drastically more fuel efficient and clean than new vehicles were even a decade ago.
Given the highly integrated nature of the industry across North America, it makes sense that regulations governing the way vehicles are manufactured should also be equally integrated between our two countries. A patchwork scenario of different sets of regulations in Canada and the U.S. makes no sense, for the simple reason that it’s very inefficient for manufacturers to produce vehicles that conform to a variety of separate and distinct regulations. Under this scenario, the only tangible result would be compromised manufacturers and dealers and higher prices for consumers, which in effect would encourage drivers to hold on to old vehicles for a longer period of time, achieving the opposite environment effect of the proposed regulations.
A harmonized approach is the right thing to do for the environment and the economy, and recognizes the reality of the integrated market and automobile industry.