Uncertainty Reigns as Trump Hits the Throttle on NAFTA Reform
President Donald Trump doesn’t want to waste any time renegotiating — or replacing — the North American Free Trade Agreement.
Yesterday, Trump announced his intention to speed up the start of negotiations, leading to much diplomatic scurrying and plenty of confusion among the ranks of North American suppliers. No one knows how the trade landscape will look once talks wrap up.
While the move aims to boost U.S. employment, many U.S. companies, as well as America’s neighbors, fear downsides from potential tariffs.
“I would like to speed it up if possible,” Trump told a bipartisan committee of Senate and House representatives. “You’re the folks who can do it.”
Wilbur Ross, Trump’s pick for commerce secretary, will lead negotiations. The administration must provide Congress with written notice 90 days before the start of talks.
“I want to change it and maybe we do a new NAFTA,” Trump said. “Maybe we put an extra ‘F’ in the term NAFTA. You know what the ‘F’ is for, right? Free and fair trade. Not just free trade.”
He added, “I don’t care if it’s the renovation of NAFTA or a brand new NAFTA, but we do have to make it fair.”
Mexico, which Trump previously threatened with a 20-percent tax on imported goods (after threatening 35 percent before the election), is reportedly embarking on a 90-day consultation process with business groups. Canada, which remains open to new trade talks, recently booted its foreign affairs minister in favor of a shrewder negotiator.
In terms of the auto sector, the main worry remains the impact of increased taxation on goods manufactured in Mexico. Both suppliers and car manufacturers could face increased costs. Indeed, 65 percent of all foreign industrial investment in Mexico comes from auto suppliers, and 19 percent of auto parts firms operating in Mexico are American.
Because of the lengthy nature of the supply chain, many auto parts move across borders several times before the finished product rolls of the assembly line. Would a part end up being taxed multiple times?
“Are you going to charge a tariff four times? It cannot be done. You have to sit at the table, talk and explain it,” said Pierre Alarie, Canadian Ambassador to Mexico, in an interview with the Mexican newspaper Reforma. The complex nature of the auto industry makes a 20-percent border tax a non-starter, he said.
There’s also the chance Trump could increase North American content requirements for vehicles. That would reduce the number of parts imported from Asia, while spurring investment in the U.S. (and possibly its neighbors). It could also increase the cost of a vehicle.
“It’s all in the way you write the rules,” Eric Miller, head of consulting firm Rideau Potomac Strategy Group, told CBC.
Shifting production of auto parts made in Mexico back to the U.S. would take time, and many suppliers would have to weigh the costs and alternatives first. Brandon Stallard, CEO of the Michigan-based automotive industry company TPS Logistics, told The Detroit Free Press suppliers are gearing up for possible changes to their operations.
“When you are talking about NAFTA, absolutely, folks are very concerned,” he said. “And frankly (companies) don’t believe they can pivot fast enough.”
Stallard added, “I spent some time last week with a group of suppliers and … they very definitely are looking at contingency plans.”
[Sources: CBC, Toronto Star, Detroit Free Press] [Image: Fiat Chrysler Automobiles]
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In the end, vehicles parts made in Mexico probably won't be subject to a tariff. Good ole USA assembly, ya know? But only for the Big 3. VW, Nissan, Honda, et all (those furrin non-union manufacturers) won't get a tariff "pass". Big 3 vehicles made in Mexico? Another tariff pass; claims of the money going to "Detroit" or the repair parts will be made in the good ole US of A. What is more probleming about the tariff is that the best European/Japanese vehicles may not make it to the US due to tariffs. Then again, mediocre Japanese cars could be GM's wet dream.
My main fear is that smaller manufacturers may end up leaving the U.S. Take Mazda, for example. I own two of their recent products, so the company's future here is of some interest to me. Mazda is already a tiny automaker with tiny sales. They manufacture their cars in Japan, and more recently, Mexico. If Trump slaps tariffs on the Mexican-made cars, that will either force Mazda to raise the prices of those, or move all production back to Japan. Producing and exporting here from Japan is already expensive, and will probably become even more so. If the budgets don't make sense, I could see them giving up here in the USA - a la Suzuki in 2012. Subaru, the other tiny Japan automaker, has it a bit better since they manufacturer some cars in Pence's home state of Indiana. Anyway, if I'm left with two orphan cars with zilch resale value and hard-to-find parts, I'm not going to be a happy camper.