Donald Trump and Canadian Prime Minister Justin Trudeau both cried victory over a new trade deal between the two countries and Mexico, but it poses challenges, especially for carmakers.
The accord, the United States Mexico Canada Agreement (USMCA), was agreed to Sunday and removes much of the uncertainty about future trade and investment in the three-country bloc, which is a big plus. But it also increases the requirements for local content production and for the first time specifies minimum wage levels, which is problematic for German carmakers and their suppliers.
The new conditions are supposed to bring more auto production to the US, something Mr. Trump promised his voters. The US President said the current, 24-year-old North American Free Trade Agreement (NAFTA) led to job losses as companies moved their manufacturing abroad, especially to Mexico.
The two rules on local content and minimum wages pose a challenge for Volkswagen, Daimler and BMW, especially for their production sites in Mexico. For imports to be freed from tariffs, the new treaty, which must still be approved by national legislators, raises the local content requirement from 62.5 percent to 75 percent, starting in 2020. This will affect German carmakers, who by and large import engines from Europe. If they transferred engine production to North America, they would significantly impact their European factories.
New trade barriers?
Another new requirement, that at least two-fifths of the vehicle be produced by workers earning at least $16 an hour, is designed to either increase US production or promote wage increases in Mexico, where it is well below this new level. Increasing higher wages, however, would eat into the profitability of production in Mexico, where VW, BMW and Mercedes as well as their German suppliers, like Bosch and Continental, have plants. This requirement will also impact Japanese carmakers like Toyota and Nissan.
“A close examination of the new treaty will have to show whether trade can flow unhindered as it does under NAFTA or whether new trade barriers are being raised,” said Joachim Lang, head of the business lobby group BDI, which represents German manufacturers.
European carmakers could still export vehicles from Europe and pay the current 2.5 percent tariff, but there is a risk the Trump administration will hike this duty to 20 or 25 percent. US Secretary of Commerce, Wilbur Ross, is currently examining whether to increase the duties on imported cars. The US and EU called a ceasefire in this dispute pending negotiations over a new trade treaty. The initial meeting last month, however, made little progress.
German manufacturers also face uncertainty with the new deal, because it requires approval from legislatures in the US, Canada and Mexico. With the US’ midterm elections next month, it will likely be 2019 before Congress can take up the issue. The result could depend on whether Republicans retain control in both houses.
Annett Meiritz is a Washington correspondent for Handelsblatt and Gerd Braune is Canadian correspondent. Till Hoppe is a Brussels correspondent for Handelsblatt. Darrell Delamaide adapted this story into English for Handelsblatt Global. To contact the authors: firstname.lastname@example.org, email@example.com, and firstname.lastname@example.org.