The Trade Numerologist: New NAFTA Deal Boosts US Auto, Farmers
This column is based on data from Global Trade
NAFTA is alive.
Canada and the Trump administration found common ground late Sunday night, signing a last-minute pact to revamp the North American Free Trade Agreement, which sets the rules for over $1.1 trillion of annual trade.
Negotiated as seconds ticked down to a final deadline, the bargain allows Canada to join a redone treaty that Mexico and the US concluded in August.
In broad terms, the new accord - to be baptized the US-Mexico-Canada Agreement, or USMCA -- gets Canada access to US markets and protection for NAFTA's court system for resolving trade disputes.
In exchange, the US gets commitments to shift more of the automotive industry's supply chains to North America and raise wages for autoworkers, more protection for US pharmaceutical firms, and more access for US farmers to Canadian dairy markets.
The new treaty also imposes stricter protections for intellectual property rights, and implements new rules for the banking and tech sectors.
The resolution came a surprise to trade observers: Trump administration officials told Congress last week they didn't think there was enough common ground to secure a new treaty.
To be sure, the final version is scheduled to be signed in late November between leaders of the three countries, must still be ratified by Congress and the two other legislatures, and many provisions don't take effect until 2020.
Trump called the agreement "wonderful". In a Tweet, he wrote: "It is a great deal for all three countries, solves the many deficiencies and mistakes in NAFTA, greatly opens markets to our Farmers and Manufacturers." He added that it would "bring all three Great Nations closer together in competition with the rest of the world."
For the US, the deal is also part of a strategy to import less from China, and more from the Americas. Despite the Trump administration's fierce protectionism, the US and its consumers are still heavily dependent on imports. A deal puts pressure on China to grant better trade terms, and deflates the risk of higher prices for US consumers.
Top sources of US imports, first 7 months, 2018
- China $296.8 billion (+9%)
- Mexico $197.6 billion (10%)
- Canada $186.7 billion (+8%)
- Japan $82.1 billion (+5%)
- Germany $73.3 billion (+11%)
- South Korea $41.6 billion (+1%)
- UK $34.1 billion (+12%)
- Ireland $33 billion (+17%)
- Italy $31.7 billion (+14%)
- India $31.4 billion (+13%)
The most significant part of the deal concerns the automotive sector. After 2020, a car shipped to the US can only qualify for zero tariffs if 75% of its parts are made in the US, Canada and Mexico, up from 62.5%. In addition, 30% of the work on a car must be done by a worker making $16 an hour or more.
The new rules could increase car prices or push automakers outside the bloc, but they protect the supply chains that automakers have relied on since NAFTA was concluded in 1994 that knit together factories in southern Canada and the northern US.
Currently, companies manufacturing cars in Canada, Mexico and the US import large numbers of car parts from outside the bloc, especially from China. They make up three of the world's top five importers of car parts, shipping in over $50 billion a year in such components.
Top importers of car & truck parts, first 6 months, 2018
- US $34.8 billion
- Germany $23.7 billion
- China $14 billion*
- Mexico $13.6 billion
- Canada $10.5 billion
- Spain $10.2 billion
- UK $8.8 billion
- France $9.4 billion
- Czech Republic $5.9 billion
- Slovakia $5.1 billion
- *Projection based on first quarter, 2018
The Trump administration hopes that mandating that a bigger percentage of cars be made in North America will reignite the US auto industry, and its domestic parts suppliers. Earlier this year, the US had threatened wide-ranging tariffs on all foreign car imports.
But the aim of the rewrite is not just to stop US companies from moving to Mexico or buying parts from Canada. It's also to for automakers to buy more parts within NAFTA, instead of importing them from Asia.
And Canada finally agreed to eliminate some of its stiff protections on its dairy industry. Despite proximity, Canada lags far behind Mexico in overall dairy imports from its NAFTA neighbor.
Top buyers of US dairy products, first 7 months, 2018
- Mexico $806 million (+2%)
- China $229.7 million (-4%)
- Canada $195.3 million (-6%)
- South Korea $173.4 million (-1.3%)
- Japan $156.4 million (+7%)
- Philippines $139 million (-6%)
- Indonesia $89.2 million (+36%)
- Vietnam $76.1 million (+74%)
- Australia $68.1 million (-6%)
- Malaysia $53.2 million (+32%)
The US dropped its request to get rid of the so-called Chapter 19 provisions, NAFTA courts which allow countries to challenge each other's trade restrictions. Canadian officials have insisted they need the courts to contest the US's continued embrace of tariffs on everything from wood to airplane parts.
Despite the optimism declared on Sunday, the overall agreement must now be ratified by Congress. That might not happen until next year, when Democrats could control the House. In Mexico and Canada, the legislatures are expected to ratify the deal without much contest.
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