Goodbye NAFTA. Hello USMCA. It's the "single greatest agreement ever signed".
What did it do?
There are two ways to look at things.
- It prevented an absolute tariff disaster
- Hardly anything at all
Curiously, both viewpoints are accurate.
In regards to point number one, Trump threatened to put 25% on all cars and parts from Mexico and Canada. Had Canada not signed, the stand-alone deal with Mexico would likely not have passed Congress.
In regards to point number two, the most significant aspect is that Trump will not follow through with his threat to put a 25% tariff on cars from Canada and Mexico. In other words, we are basically where we were before Trump verbally blasted Canada and Mexico.
Will Congress Approve?
"I plan to sign the agreement by the end of November. I then will submit it for approval to Congress where, in theory, there should be no trouble -- but anything you submit to Congress is trouble, no matter what," Trump said. "It's the single greatest agreement ever signed but they'll say, 'Well, Trump likes it, therefore we're not going to approve it because that'll be good for the Republicans, so therefore we can't approve it.' "
The problem is obvious. We do not know the makeup of the next Senate.
I expect passage, but Democrats are out for blood.
What's In USMCA?
The U.S.-Mexico-Canada Agreement eases uncertainty about the Trump administration’s trade policies, helping auto makers move forward with factory investments.
The tentative pact, which still must be approved by Congress, spares auto makers from costly tariffs on cars imported from Canada and Mexico, a major relief for an industry that has for more than two decades relied on duty-free trade to expand operations in North America. But the new rules could also force car companies and their parts makers to alter their supply chains, potentially increasing costs at time when profits are already under pressure from slowing new-car sales in the U.S., industry officials and consultants say.
Does that sound like a win to you? It doesn't to me. But it is a win vs Trump's absurd proposal to place 25% tariffs on cars and car parts.
The tentative deal for North America would require at least 75% of a car’s value be produced from parts and material made in the region, up from 62.5% under the current agreement.
That sounds like a win, but the math is fuzzy. The word "value" is vague. Labor unions do not think it goes far enough. And although the current rules stipulate 62.5% we are at about 75% right now, in practice. The change did not accomplish much, if anything. It's a symbolic bone for unions.
Car companies would also have to ensure 40% to 45% of the vehicle is made by workers earning at least $16 an hour, a provision aimed at steering more work to the U.S. to generate manufacturing jobs. Vehicles that don’t meet the new rules will be subject to a 2.5% tariff.
The WSJ article addresses this point directly: "Industry analysts, however, don’t anticipate the new accord will result in a windfall of new U.S. auto factory jobs because a 2.5% tariff is still too low to compel car companies to relocate assembly line work."
“I don’t see anything huge in this that moves production to the U.S.,” said Kristin Dziczek, a labor and manufacturing expert with the Ann Arbor, Mich.-based Center for Automotive Research.
This one is humorous.
“Any changes would manifest long term,” said Ron Harbour, a manufacturing expert with consulting firm Oliver Wyman. “It doesn’t sound like it would trigger immediate changes. I think that was intentional.”
In other words, the agreement intentionally did nothing. This is why Mexico signed.
Auto executives have warned the hefty import tariff, which would also apply to parts manufactured overseas, could drive up costs, increase prices for consumers and potentially limit selection if enacted.
Thus, we still have the threat of a 25% tariff on EU- and Asia-manufactured cars. If Trump walks that back in the same fashion, we will have another "greatest ever" deal that does nothing.
Ten Things to Know About the New Nafta Deal
Here are a few things not in the above discussion.
Trump wanted a 5-Year sunset provision.
Yes, that's absurd. Corporations want more than a 5-year window or they will not be willing to make fixed investments.
Trump backed off that 5-year provision at Canada's insistence. USMCA has a 16-year sunset provision. Trump will be long gone.
U.S. officials negotiated greater access to Canada’s dairy market, where a government system controls prices and limits the amount of imports with steep tariffs. The dairy deal is likely to win praise from lawmakers from milk-rich U.S. states.
This was a Trump "win", but in the grand scheme of things, it's trivial. It may help Republicans in the mid-term elections, or not. It's all about individual match-ups and overall voter anger.
Canadian officials fought to keep another arbitration system that allows the country to challenge U.S. duties on allegedly dumped or subsidized Canadian imports. U.S. trade representative Robert Lighthizer and American lumber producers had wanted to scrap the system, but in a victory for Ottawa, the U.S. agreed to keep it.
Nothing changed vs NAFTA.
Under its agreement last month, Mexico would be protected from the brunt of any national-security tariffs the Trump administration is considering on vehicles and auto parts, and Canada got a similar deal, a U.S. official said late Sunday. But Mr. Lighthizer has said that any respite for Canada from steel and aluminum tariffs will have to be negotiated separately.
The previous (more current) article shows Canada is exempt as well. Nothing changed vs NAFTA.
Wins and Losses
- Trump won a minor concession on dairy.
- Auto manufacturers are spared disastrous tariffs, but that is the status quo vs NAFTA.
- No job wins. No job losses.
- Based on new rules, there might be supply chain disruptions, a clear loss.
- Union leaders are lukewarm to the deal. They did not think it went far enough.
- If there is an increase in price due to labor provisions, it will be a direct loss to consumers who will pay a higher price or manufacturers who will eat the cost increase. Most likely, consumers will take a hit, if anyone does.
The deal tweaked some things resulting in a small win for US dairy farmers. The rest keeps the status quo vs NAFTA with a potential win for unions at the expense of consumers. If, so, that is a larger net-negative.
This we hail as the "Single Greatest Agreement Ever Signed"
Mike "Mish" Shedlock