The Fuse

The New NAFTA Calms Some Automaker and Energy Concerns

by Alex Adams | @alexjhadams | October 01, 2018

Late on Sunday night, Canada, Mexico and the U.S. reached an agreement on a new North American trade deal called the United States–Mexico–Canada Agreement (USMCA), a replacement to NAFTA which President Trump calls “the most important trade deal we’ve ever made by far.” Although the exact terms of the new trilateral accord remain unclear, the early signs for the auto industry are “encouraging,” and key portions of NAFTA that benefited the energy industry remain largely unchanged.

The auto industry has been a particular focus for attention throughout these talks, as the Trump administration continues to weigh imposing tariffs on vehicles built in Europe and sold in the U.S. Under the new USCMA, the U.S. has preserved the right to impose emergency tariffs of up to 25 percent on cars and car parts on national security grounds. However, this agreement creates carveouts for both Canada and Mexico—neither country will be affected by auto tariffs unless exports top 2.6 million units annually.

Neither Canada nor Mexico will be affected by auto tariffs unless exports top 2.6 million units annually.

As this stipulation represents current production plus growth of at least 40 percent, it is unlikely that either country would be affected by the proposed 25 percent auto tariff the U.S. has proposed elsewhere, particularly on European vehicles. The U.S. Department of Commerce held two days of hearings on whether the U.S. should levy these tariffs on vehicles built in Europe and sold in the U.S., but the administration has yet to make a final decision.

Industry has reacted with cautious optimism after the USMCA announcement, with the Auto Alliance calling the agreement an “encouraging development.” A statement from the group added that the North American auto industry “needs to have all three countries included in the agreement to realize the benefits and goals of a new pact.” Similarly, GM and Ford have voiced their support and shares of both companies have jumped “in relief” at the announcement of the trilateral pact, as failing to include Canada would have disrupted supply chains.

However, the new agreement makes rules of origin more demanding for automakers, as the deal gradually raises the required percentage of regional auto production from 62.5 percent to 75 percent. Additionally, starting in 2020 cars and trucks should have at least 30 percent of the work on a vehicle carried out by workers earning $16 per hour, moving up to 40 percent for cars by 2023. The move has raised concerns among some economists that car prices might rise and some small cars may no longer be made in North America due to higher costs.

In the energy industry, the new trade agreement is not expected to impede energy flows, and also appears to preserve investor protections considered crucial to U.S. oil and gas investment in Mexico’s liberalized upstream sector.

The new trade agreement is not expected to impede energy flows

David Goldwyn, a former international energy envoy for the U.S. State Department and chairman of the Atlantic Council Global Energy Center’s Energy Advisory Board, described the deal as “a step forward for the future of Mexico’s energy development, assuring that current and future investors (should Mexico continue to seek them) will have strong protections against a possible administrative recession of contracts.”

Such investor protections in NAFTA have been critical for the recent wave of U.S. and Canadian companies investing in Mexico’s upstream sector. The USMCA appears to lay concerns to rest that revisions to NAFTA would endanger such protections, given uncertainty surrounding whether incoming president Andres Manuel Lopez Obrador will keep these upstream energy reforms in place.