Trade deal is likely to hike car prices
US consumers may pay Mexican production costs
Although it may be too early to predict the full impact of President Donald Trump’s tentative trade agreement with Mexico, there’s one thing you can count on: Prices on new cars will probably rise.
“The new agreement will push production costs higher on Mexican products — parts and vehicles — which, eventually, will be paid by American consumers,” said Michelle Krebs, executive analyst at Autotrader, the car-shopping website owned by Cox Automotive.
Trump said Monday that he had made a limited bilateral trade agreement with Mexico that excludes Canada. He said the North American Free Trade Agreement will be called the U.S.-Mexico trade agreement.
Automakers have already absorbed costs related to aluminum and steel tariffs.
“Vehicle costs are going up for other reasons as well — higher transaction prices because of the richer mix of utility vehicles, metal tariffs, more technology content,” Krebs said. “A new NAFTA agreement will only add to the price headwind consumers are already facing.
“More people will be pushed out of the new car market and will turn to the used car market,” Krebs said. “Already, in anticipation of tariffs, used car prices, which typically decline in summer, have been rising — for 10 straight weeks now.”
The move would raise overall costs by requiring 75 percent of the value of parts in a car to be made in North America and 40 percent of the total car to be built in plants where the workers make at least $16 per hour.
Analysts noted that Mexico has been aggressive about looking beyond the United States for beneficial trade deals.
“There has been investment from Korean, Japanese, Chinese and German automakers,” said Dave Sullivan, manager of product analysis at AutoPacific. “This has resulted into a mushrooming supplier base in Mexico. For automakers, the prospect of business as usual with Mexico allows for further investment in product and assembly decisions that can also impact production decisions in the U.S. The fact is, assembly work in the U.S. is still quite dependent on low-cost countries producing the parts to allow for higher cost final assembly in the U.S.”
Analysts said Canada will probably benefit from this new deal because the USA and Canada are high-wage countries; what helps America helps Canada.
“If Canada is not included, it’s not really a North American Free Trade Agreement anyway. But the negative image of the acronym NAFTA as a name is a delusion in President Trump’s mind,” said Robert Kolt, a public relations and communication professor at Michigan State University. “NAFTA is thought of as positive term in the public’s perception. Trump just doesn’t even want to be reminded of the name Clinton.”
NAFTA was crafted under President Bill Clinton. During the 2016 presidential race, Donald Trump and Hillary Clinton talked of the need to update the trade deal to benefit American workers.
If Clinton had been elected, she would have probably agreed to the same deal, said Krzysztof Pelc, a political science professor at McGill University in Montreal and an expert on international trade politics.
“The hardest thing to negotiate in the agreement with Mexico was the auto industry part — that was the most contentious thing in NAFTA,” he said. “Canada just needs to decide whether it’s on board or not. Details remain confidential because it’s an ongoing negotiation.”
Deciding how much of a car must be manufactured in the USA, Mexico and Canada has always been tricky, and the move carries risks.
“The irony is Canada kind of gets a free ride, though that’s something Canada would never admit to. But there’s risk here,” Pelc said. “What if the jobs don’t go to the U.S., but they go to Asia? What if car manufacturers just start importing more parts from Asia and pay the tariff ? Car producers may shrug and say the whole thing is too much of an administrative headache.”
Dennis Williams, former president of the Detroit-based United Automobile Workers, applauded Trump’s efforts to revisit the trade deal this year.
Monday, labor leaders from five big unions issued a joint statement:
“NAFTA has had a devastating impact on workers for more than 25 years. We are aggressively engaged in pursuing an agreement that works for working people in all three countries. ... Any new deal must raise wages, ensure workers’ rights and freedoms, reduce outsourcing and put the interests of working families first in all three countries.”
“The negative image of the acronym NAFTA as a name is a delusion in President Trump’s mind.”
Robert Kolt Michigan State University