Aftermarket reviewing details of proposed new after-NAFTA import/export USMCA business pact

April 8, 2019
While it’s possible that elements of this long-sought trilateral trade deal could change as negotiations continue and industry reviews of the details remain ongoing, automotive executives are cautiously optimistic that the pending U.S.-Mexico-Canada Agreement will ultimately be beneficial to the automotive sector.

While it’s possible that elements of this long-sought trilateral trade deal could change as negotiations continue and industry reviews of the details remain ongoing, automotive executives are cautiously optimistic that the pending U.S.-Mexico-Canada Agreement will ultimately be beneficial to the automotive sector.

The USMCA, also known as “NAFTA 2.0” or “the new NAFTA,” is slated to replace the North American Free Trade Agreement in 2020 upon official ratification by the legislative bodies of the United States, Canada and Mexico. It’s already been tentatively signed-off upon by the top individual leaders of the respective three nations.

As a 1,809-page tome of doorstop-like proportions containing 34 chapters and 14 side letters, at least a few slight alterations in the complexities of the text are anticipated during an extended period of debate among American, Mexican and Canadian policymakers throughout the approval processes.

Yet given that President Donald Trump is no fan of NAFTA -- having repeatedly threatened to unilaterally terminate “the catastrophe known as NAFTA” over what he considers to be highly unfavorable conditions for the U.S. -- the mere existence of the USMCA’s updated approach is a significant accomplishment for the auto industry’s cross-continental automotive interests.

“We’re very pleased that there’s an agreement,” says Ann Wilson, senior vice president of government affairs for the Motor & Equipment Manufacturers Association (MEMA). “It’s very important for us to have some sort of agreement between the three countries; the North American supply chain depends on the ability to move goods through all three countries,” she adds.

“Suppliers operate in a global economy that depends on a on a strong North American trading economy and a worldwide network of suppliers and customers for continued viability and growth,” Wilson points out. “Our industry’s 19 percent job growth can be attributed, in part, to the NAFTA model. NAFTA-enabled ‘near-shoring’ of an interconnected supply chain between the U.S., Canada and Mexico has provided opportunities for U.S. manufacturers to compete with the rest of the world.”

Wilson explains to Aftermarket Business World that “we’re supporting the agreement and we’re working through the details” to identify any aspects in need of revision. “There will be constant back and forth on this.”

MEMA is committed to keeping everyone informed as the USMCA wends its way toward passage. “We will continue to have briefings for the industry,” she says.

Just as the USMCA negotiations were hard-fought on the continental diplomatic level; Congressional approval is expected to be contentious as well. “I think personally that this is going to be a long process, and this will work out through this whole year. So don’t think if you see the agreement go up (to the House or Senate) that we’ll be able to finalize a vote on this relatively shortly,” says Wilson. “There are a lot of serious concerns from both Republicans and Democrats, and there’s going to be a lot of debate on this as we move forward.”

Long-term implications
After a delay in preparation attributed to the government shutdown earlier this year, senators and representatives are still awaiting a voluminous analysis from the U.S. International Trade Commission assessing the USMCA’s impact on the nation’s business interests.

“We urge the Commission to consider fully in its report the long-term implications of the USMCA on the automotive industry, and urge the ITC to closely consult with the industry during the agreement’s implementation and evolution,” says Bill Hanvey, president and CEO of the Auto Care Association.

In testimony before the ITC he stressed that “NAFTA was an important regional free trade agreement that contributed to the growth of our industry over the past 20 years.” In 2017 domestically produced components valued at $61 billion were shipped across the borders into Mexico and Canada, accounting for more than 70 percent of the nation’s total auto parts exports.

“Our industry’s ability to remain globally competitive supports U.S. auto exports, provides U.S. consumers with a wider selection of vehicles and parts, and keeps vehicle repair and maintenance costs affordable for working families,” according to Hanvey.

“We are encouraged to see the United States reach a trilateral trade agreement with Mexico and Canada, allowing duty-free movement of auto parts to continue between the three countries,” Hanvey says. “As we continue to review the text, we hope the modernized agreement strengthens trade in the region and promotes consistency and predictability for U.S. auto manufacturers, distributors, retailers and service providers.”

Hanvey adds that although “the USMCA will result in increased investment and/or re-shoring of production into North American supply chains,” the Auto Care Association still harbors concerns over USMCA sections pertaining to increased rules of origin, new certification requirements, a 16-year “sunset” expiration time frame, quotas capping imports exempt from the pending Section 232 Autos & Auto Parts Investigation and other issues still under review.

The overall USMCA covers $1.2 trillion in annual trade within the U.S., Canada and Mexico.

“The impact for repairers is indirect but important nonetheless,” reports Bob Redding, Washington, D.C. representative for the Automotive Service Association. “ASA wants a competitive parts marketplace for its members. We need choices and competition. “In addition, it helps repairers for each of the automotive sectors to be financially healthy,” he says, referring to both manufacturers and the aftermarket. “Depending on the issue, these sectors are all partners at various times.”

Per existing Section 232 standards, according to the Automotive Industries Association (AIA) of Canada, “Since Canada currently produces just under two million light vehicles and exports auto parts with a value of $16 billion, these are ceilings that Canada can accept without difficulty.”

“While NAFTA originally required automakers to use 62.5 percent of North American-made parts in their cars to be imported duty free, the new agreement gradually raises the bar to 75 percent by 2023, which will incentivize automakers to increase the amount of North American parts they use in their cars and light trucks,” says Owen Stuart, a market research analyst with the Freedonia Group.

“The USMCA also mandates that automakers manufacture 40 percent of their motor vehicles in facilities where assembly workers are earning at least $16 an hour,” he adds. “While average wages are even higher than that for auto assembly workers in Canada and the U.S., they are not in Mexico, where a number of U.S. automakers have shifted production in recent years to take advantage of the lower costs.”

If passage is achieved, to avoid paying import tariffs manufacturers must source a minimum of 70 percent of their steel and aluminum from within the three countries.

Mexico has also agreed to give employees the right to union representation, extend labor protections to migrant workers and protect women from on-the-job discrimination. The three signatory countries would also be able to sanction each other for labor law violations.

“We need to be assured that Mexico is going to fix weak labor laws and enforce new worker protections,” says United Auto Workers President Gary Jones. “Numerous details still need to be reviewed and resolved before making a final judgment on this agreement. New protections for working families and the closing of some loopholes for global companies seeking to ship jobs overseas are a step in the right direction, but there is more work to do.”

Jones further contends that “for a quarter century NAFTA has been disastrous for working people in the U.S., Canada, and Mexico and a gift to corporations off-shoring good U.S. jobs. The true test of a new NAFTA agreement will be in whether it protects and enhances opportunities for the U.S. workforce and leads to higher wages and benefits for UAW members and manufacturing workers who have suffered for far too long.”

He emphasizes that “we need to review and resolve the details of the agreement when they are available to be sure that this agreement truly ends NAFTA’s legacy of shuttered factories and low wages. Given the history of loopholes in NAFTA, the UAW will withhold final judgment until all the pieces are put in place in order to determine whether this agreement will protect our UAW jobs and the living standards of all Americans.”

Reflecting similar reservations, Cody Lusk, president and CEO of the American International Automobile Dealers Association, observes that “AIADA strongly supports pro-growth economic policies and is relieved that a trilateral agreement was reached with Canada and Mexico. However, we remain concerned about the potential for increased costs and lost auto jobs due to onerous new origin requirements, possible 232 tariffs and crippling uncertainty stagnating an otherwise humming economy. Ultimately, we believe that the USMCA does more to manage trade than to expand it.”

AIADA’s membership employs 578,000 people at 9,600 franchises. In 2017 they sold 9.5 million vehicles, 57 percent of total U.S. market share, while spending $4.8 billion on advertising and selling $56 billion in parts and services.

Strengthening trade partnerships
Ford is the No. 1 exporter of cars from the U.S., and its President of Global Operations, Joe Hinrichs, notes that “we stand ready to be a collaborative partner to ensure this agreement is ratified in all three markets because it will support an integrated, globally competitive automotive business in North America. The benefits of scale and global reach will help to drive volume and support manufacturing jobs.”

“For Fiat Chrysler Automobiles and the tens of thousands of workers we employ in the United States, Canada and Mexico, the USMCA is critical,” concurs FCA spokesman Shane Karr, who additionally serves as co-chair for the U.S. Chamber of Commerce-backed USMCA Coalition. “The new trade agreement incentivizes the auto industry to make new investments to build our most advanced vehicles here and will ensure that our products remain competitive in markets around the world.”

Other members of the USMCA Coalition include Ford, General Motors, Toyota and Johnson Controls, plus John Deere, Cummins, Caterpillar and other providers of specialized vehicles, assembly and replacement components, chemicals, factory equipment, manufacturing services and marketing materials.

“Trade with Canada and Mexico supports 14 million U.S. jobs across many sectors. These workers -- and the industries they support -- drive billions of dollars in annual U.S. exports,” says Gary Locke, honorary chairman of Pass USMCA, another bipartisan business group supporting the measure.

Locke previously served as U.S. Ambassador to China, U.S. Secretary of Commerce and governor of Washington. “The USMCA sets a modern precedent for freer and fairer trade not only in North America, but throughout the world,” he says. “Ratifying the agreement quickly will improve our trading relationships with Canada and Mexico, create more jobs for American workers, and propel international trade into the 21st century.”

Smaller domestic businesses will be particularly empowered to boost their exports. “The USMCA is a win for America,” says Rick Dearborn, Pass USMCA’s executive director. “It will launch the nation into a new era of economic and creative prosperity. Congress must seize this opportunity to strengthen our North American trading partnerships.”

“Passing the new trade pact with Mexico and Canada isn’t a partisan issue,” says Locke. “This deal benefits every American.”

Selecting North American suppliers
A survey of 100 U.S.-based automotive executives by the LevaData supply chain consultancy reveals that 78 percent of them believe that the required USMCA changes will have a positive impact on their company in the long term, and more than half (53 percent) feel that the USMCA will ultimately increase North American vehicle manufacturing and provide a net improvement for workers and consumers.

However, many of the participants also acknowledge that production costs will increase significantly, resulting in higher prices for consumers:

  • 41 percent believe production costs will increase by 10 percent over the next three years, and a significant number (26 percent) believe the increase could be 25 percent or more.
  • 58 percent agree these increases will results in higher costs for consumers.
  • Electronic components were called out as one area where increased costs are expected, with 39 percent agreeing that the USMCA will somewhat or significantly impact costs. The impact of these increases will likely be multiplied as these components increasingly make up a larger share of a car’s overall cost.
  • Labor is highlighted as an area that will become more costly, with 73 percent stating employee payroll costs will increase or their workforce will be cut.

Industry executives “will require a better upstream assessment of geopolitical risk considerations going forward,” explains Rajesh Kalidindi, LevaData’s founder and CEO. “Knowing where tariffs might be applied and how they could impact cost and supply will be increasingly important.”

In addition to raising prices on finished goods, managers “will aggressively seek savings in the supply chain to reduce the impact of higher production costs.” Citing the poll’s results, 36 percent plan to renegotiate parts supply deals to pass costs to suppliers, and 35 percent will look for cost savings in the production process.

“Pressure to source components from suppliers near North American assembly plants is also a top concern,” according to Kalidindi: 61 percent predict that suppliers near assembly plants will be favored somewhat or significantly, with 78 percent reporting that finding North American suppliers or identifying alternate suppliers are near-term priorities for their supply chain operations.

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