The revised trade agreement between Canada, Mexico and the U.S. should buoy automotive manufacturing in North America and give the Trump administration heightened leverage in its trade negotiations with China.
For U.S. carmakers, the deal concludes months of anxiety over President Trump’s promise to renegotiate the North American Free Trade Agreement. The manufacturers had taken advantage of the treaty from the early 1990s to build more cost-effective supply chains that criss-crossed the three member countries, so the White House talks outweighed even concerns over tariffs on steel, aluminum imports and $250 billion in Chinese products.
While analysts predict the pact unveiled late Sunday night will increase production costs, ultimately forcing car buyers to pay more, it should also spur new investment in the three countries from both domestic and international automakers.
In a show of confidence, the Dow Jones U.S. Automobiles & Parts Index rose 3.3 percent on Monday.
While the deal must still be approved by Congress, experts say it would give companies the certainty they need for production decisions typically made years in advance of any actual operational shifts.
Manufacturing in the U.S. and Canada will get a boost from key provisions including an increase from 62 percent to 75 percent in the portion of an automobile that must be made in North America in order to avoid tariffs.
The deal would also require that 40 to 45 percent of the content be produced by workers making a minimum of $16 per hour, a clause likely to shift some production away from Mexico, where the average wage is much lower.
Companies like Ford, General Motors and Fiat Chrysler are said to already be in the early stages of examining how to adapt their supply chains to the altered trading environment.
A GM spokeswoman said the company looks forward to “continued collaboration as the agreement is implemented.” Spokespersons for Ford and Fiat Chrysler did not respond to requests for comment.
Companies are expected to add plants in one of the three countries and pay higher wages to meet the new deal’s requirements, according to CFRA senior equity analyst Garrett Nelson.
“It’s going to raise costs,” he told the Washington Examiner. “The North American auto market is going to stay more contained. Less sourcing of products from China and elsewhere.”
The industry remains fearful that the White House will move forward with its threat of a 25 percent tariff on automotive imports or escalate its trade skirmish with China. President Trump said Monday that metals tariffs would continue to apply to Mexico and Canada despite the new agreement.
While carmakers are coping with higher costs for now by raising prices, but that isn’t a sustainable strategy, said Rajesh Kalidindi, founder of supply chain technology firm LevaData.
“They can get through the short-term, but they are going to have to plan for some big changes in their supply chain to be able to reduce a little bit of that impact of the higher cost of labor and the higher cost of goods,” he said in a recent interview
When NAFTA went into effect in 1994, North America accounted for 31 percent of international auto manufacturing, according to WardsAuto Intelligence. That number dropped to 15.9 percent in 2017, as production lines became more global and companies increasingly relied on low-cost labor in countries like China.
“You’re seeing a much stronger North American trading bloc come out of this, which should give them more leverage over China,” Nelson said.
Despite the three countries reaching a preliminary deal, the months of uncertainty over the future of NAFTA are likely to leave a lasting impression on all the parties involved.
No longer will the lowest price dictate sourcing decisions, experts say. Instead, auto companies could begin using multiple suppliers in various locations to curb geopolitical risk.
And after months of fraught negotiations — complicated by President Trump’s tendency to disrupt talks with barbs aimed at government leaders – Mexico and Canada are likely to change the types of trade deals and investments they make to shield against future disruptions.
“It shows how interlinked and cozy people got,” Kalidindi said. “Now, it’s figuring out [the] strategy to not be so impacted when something like this happens.”
