Renegotiation of NAFTA/USMCA and its impact on Automobile Industry

This article discusses the renegotiation of NAFTA/USMCA and its impact on the automobile industry. It explores changes in country of origin rules, labor provisions, and other aspects of the trade agreement. The article also examines the potential consequences for automobile manufacturers in the United States, Canada, and Mexico.

Running head: AUTOMOBILE INDUSTRY 1
Renegotiation of NAFTA/USMCA and its impact on Automobile Industry
Name
Institution

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Abstract
The United States reached a trade agreement with Canada and Mexico which made
NAFTA to be branded USMCA in order to accommodate the two countries. This trade deal has
significant implication on various industries. The most affected industry is the automobile
industry which has since elicited mixed reactions from a number of stakeholders. The initial goal
of this deal was to make it convenient for automobile and suppliers to invest in domestic plants
as a result of making it more expensive to produce outside the United States. Although the three
countries reached an agreement after constant negotiations, the congress is yet to debate on the
issue for approval. Among the most pertinent issues that are contained in the agreement
encompasses country of origin rules where the United States suggest that Mexico and Canada
can be exempted from tariffs provided that they are able to manufacture vehicles that contain 75
percent of parts made in North America.
This value has been increased from 62.5 which was the rule under NAFTA. Another
change in the deal concerns labor provisions where the new law requires all the countries to pay
a minimum wage of 16 dollars per hour for workers employed in automobile industries as well as
encouraging unionization. Investor state disputes is another element that is discussed. Moreover,
the time frame of when the deal is likely to last came up. USMCA is said to have a lifespan of 16
years after which, it will be terminated or renegotiated. Other changes that were made to the new
deal involves certificate of origin, access to the Canadian dairy market, intellectual property and
electronic trade, non-market economies and energy in Mexico. Even though the new trade
agreement has implication on various industries, focus is directed to automobile industry which
has immense consequences for these countries.
Introduction

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The United States government recently announced the change of North America Free
Trade Agreement for purposes of introducing Canada and Mexico on board. As a result, NAFTA
was changed to USMCA which is an acronym for United States Mexico Canada Agreement
(Burfisher, Lambert & Matheson, 2019). The new framework has introduced four elements that
affect the automobile industry. These four elements play a significant role in influencing a
number of aspect in automobile industry. The four measures introduced include increasing the
number of North American parts to be imported duty free from 62.5 percent to 75 percent by
2023 (Yates & Holmes, 2019).
The new framework also suggest that automobile industries manufacture 40 percent of
vehicles in facilities where the employees are paid a minimum wage of sixteen dollars an hour
(Lambert & Matheson, 2019). This minimum wage is surpassed in the United States and in
Canada. However, automobile industries in Mexico offer lower minimum wages than the figure
proposed which has encouraged automakers in the United States to shift their manufacturing
capacity to Mexico (Herzenberg, 2016). Also, the government of Mexico is mandated to allow
its workers to form a collective bargaining agreement through forming unions that are regulated
(Shen, 2019). In addition, the agreement requires the United States government to exempt
Canada and Mexico from potential tariffs in future on some vehicles and spare parts.
Other measures that were introduced include investor-state dispute where the new
arrangement eliminates expert trilateral panels that are powered to resolve government investor
disputes. This move has huge implications for automobile industries (De la Torre Gonzalez,
2018).
These measures that were introduced by the new agreement have significant influence on
automobile industry. For instance, these measures are likely to increase the cost of producing

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vehicles in North America (Compa, 2019). Furthermore, the cost of manufacturing parts in
Mexico will rise since the minimum wage is increased to 16 dollars per hour yet Mexico is
characterized to pay its employees lower wages than the figure recommended by USMCA. In
addition, unionization will increase in order to comply with the agreement which suggests that
more regulation will increase the cost of production among the parties to this agreement
(Stanford, 2019). Nonetheless, spare parts for the vehicles are going to increase as a result of the
regulation that requires North America manufactures to make more parts. In essence, the new
framework will reduce overreliance on cheap car parts outsourced from other countries. This
aspect will also play a significant role in increasing production cost (Chepeliev, Tyner & van der
Mensbrugghe, 2019). Moreover, the deal is likely to change auto parts production among the
three countries.
Uncertainty with respect to what the future holds for automobile industry in the three
countries brings up a contentious debate on the long-term impact of the agreement (Lamp, 2018).
However, Ford, a manufacturer in the United States welcomed the agreement terming it as
inspiring because they look forward to an industry that supports and integrated, globally
competitive industry in North America. Companies such as Ford welcomed the idea because
Canada and Mexico had the potential to disrupt the automobile industry in North America
(Dawson, 2019). Now that both Canada and Mexico are on board, the tariffs that were proposed
will not be effected.
Both Mexico and Canada welcome the higher production cost because it is viewed as a
better deal compared to tariffs that were initially proposed by Trumps administration. The supply
chain for automobile manufactures in the United States are expected to run smoothly as a result
of the new framework (Meade, 2019). However, consumers may stall from purchasing the

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vehicles if they consider prices to be high. Automobile manufacturers are forced to consider
various aspects such as absorbing higher cost as lost margin, renegotiate supply deals, raise
prices of finished goods and change product offering as a means to make them inexpensive
(Kaul, n.d).
The current production capacity in Mexico is over 70 percent compliant to the new
regulations brought by USMCA. The need to comply by Mexico is associated to the great
investments that they are likely to receive as a result of manufacturing capacity shifting from
China, Korea and Japan. It is also alluded that the implication of USMCA has different
consequences for automotive industry in North America (Hurrelmann et al, 2018). Consequently,
manufacturers in Mexico are gearing up to renegotiate with the hope that export orientation and
openness remain as it is. The purpose of this renegotiation is to improve relationship between the
countries.
Another implication to this new regulation is that companies that are more prepared to
change will have an opportunity to take strategic advantage compared to firms that are likely to
resists change (Baker & Keiser, 2019). Based on a study that was conducted by Propeller Insight,
63 % of automobile leaders suggests that production cost is likely to increase as a result of the
new trade framework. However, majority of them attested that there is a likely chance that
challenges related to cost are going to affect parties involved. Similarly, 78 % of the respondents
indicated that new regulation made by USMCA will likely have a positive impact for their
automobile companies in the future (Gereffi, 2018). Besides, 53 % of the executives in
automobile industry indicated that the new framework will likely increase manufacturing
capacity and improve workers concerns. The study also determined that automobile firms will be
forced to change their contracts with suppliers in order to save cost. 36 percent of the

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respondents claim that they will renegotiate deals to pass the cost to the suppliers while 35
percent claimed that they plan to save cost in the production process (Andreas, & Biersteker,
2014). The challenging implication for North American manufacturers is that some of them had
shifted their manufacturing to Mexico as a means to cut production cost before the new
framework was announced.
Mexico has played a significant role in revamping its product safety regulations by
introducing measures to conform to the standards in the United States. Initially compliance used
to be relaxed but now it is mandated that companies report risks to Mexican authorities (Deyo,
2016). Companies are also subjected to mandatory recall requirements that are enforced by
Mexican consumer protection agency. The agency has been empowered to remove, demand
repair for faulty products, open investigation and imposing various sanctions. Also, the new
structure is likely to reduce trade in automotive industry in North America. This is because
USMCA relaxed rules of origin allowing Mexico and Canada to build cars and trucks and selling
them to the United States market (Law, 2017).
The new law increases competition for manufactures in North American since even parts
are expected to be sourced from these two countries. To North America, the wage rule removes
the incentive of investment and production in Mexico as a result lower scales and production
capacity which will reduce U.S auto imports to Mexico (Gereffi, 2018). In addition, the new
proposed situation will reduce auto exports to the rest of the world. Consequently, limiting
access to auto parts makes North American production more expensive and less competitive
because Asia and Europe are not subject to the new deal (Rawlinson & Wells, 2016).
Stakeholders in the automobile industry are preparing for more tariff among other trade
related impacts (Carey & Holmes, 2017). This is because higher costs imply that North

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American consumers will have to pay more for the cars to be manufactured in the United States.
The high cost of production passed to the consumer is likely to attract auto imports from Asia
and Europe. On the contrary, various automakers suggest that raising of tariff is a much better
approach that the current constituted USMCA (Olson et al, 2016). In addition, the new
framework proposed by USMCA does not protect automobile industries in Canada and Mexico.
Automobile companies in Mexico and Canada may opt out of the deal because new wage
structure and increased cost is likely to make them to decide to manufacture their cars without
conforming to the USMCA regulations (Canis, Villarreal & Jones, 2017). Mexico can decide to
seek other markets in Europe since only 30 percent of the vehicles shipped to North American
are said to be non-conforming. This implies that Mexico can pay for the tariff on the 30 percent
and increase production to make them competitive in the market without having to conform to
USMCA (Rothstein, 2016).
Increasing the tariff from 2.5 to 25 percent offers Mexico and Canada two areas to
negotiate in order to protect cars being manufactured from facing the new changes on tariffs
(Otero, 2018). However, Trumps administration closed the opportunity for the countries to
negotiate in case of an increase in tariff because it will expect Mexico to access the 2.5 percent
tariff only if it complies with the original NAFTA regulation for automobile industry (Gustavo
del Castillo, 2018). It therefore implies that assembling in Mexico cannot import engines from
Asia and Europe as a means to keep their cost low. Another closed opportunity is that the
number of Mexican cars to North American under this framework is limited to 1.6 million units
in a year (Bloomfield, 2017). The new framework will block Mexico and Canada from making
trades with Asia and Europe. This is because under the new formula Canada would need to
inform U.S three months prior before making negotiations with China.

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Consequently, in the event that a deal is reached between Canada and China, Trumps
administration will terminate the USMCA within six months. On the contrary, this clause allows
Mexico and Canada to withdraw from USMCA within six months without any justification
(Lipsey & Meller, 2016). The sustainability of this trade depends on a trade agreement that
benefits all the parties in the agreement. Currently, Mexico and Canada leaders are worried of
the implication of the USMCA is rolled out officially (Cross, 2016). There are many challenges
that need to be addressed in the coming debate in order to ensure that everyone is satisfied the
outcome of the deal. The most outstanding achievement that Canadians have achieved is to
preserve Chapter 19 of NAFTA which allows the three countries to challenge each other with
respect to anti-dumping laws (Safdie, 2018). This is considered to be easier, less costly and more
predictable process to amend trade practices. Canadians challenged the new tariff proposed by
Trumps’ administration citing that it would have negative impact on Canadian automobile
industry which attracts a revenue of over 50 billion dollars and sustains hundreds of thousands of
jobs in Canada (Gao, et al, 2016). Furthermore, the agreement would protect the first 2.6 million
units which is more than the average cars exported to North America. There are various
provisions in the new deal that suggest that cars will be exempted from tariffs if they meet
certain requirements that are proposed and contained in NAFTA (Bloomfield, 2017).
Conclusion
Regardless of the standpoint between the implications of NAFTA/USMCA. There are
beneficial aspects to reap from the deal by Canada and Mexico. Among some of these benefits
include growth and opportunity arising from uncertainty. Furthermore, the new framework
facilitates data flow which necessitates the three countries to have independent regulatory
requirements. Besides, it also allows transfer if information between the three countries without

AUTOMOBILE INDUSTRY 9
any restrictions. Labor mobility among the parties is going to be enhanced which will allow from
mutual recognition of professional qualifications. Moreover, the new policy framework will
improve function of management and competitiveness. In addition, issues related to tariffs will
be shelved if the renegotiation process succeeds based on the current terms.

AUTOMOBILE INDUSTRY 10
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