By on May 1, 2018

Steel Mill

May kicked off with a bundle of trade deals going into hibernation mode. After some legitimate — albeit quaint — progress, NAFTA decided to take a break this week. Currently, U.S. Trade Representative Robert Lighthizer is in China to circumvent that brewing trade war and is unable to commit himself to the North American Free Trade Agreement’s renegotiation.

That’s probably fine, because Mexico’s auto reps need time to cool off.

The United States’ most recent proposal for increasing NAFTA’s regional automotive content includes a four-year evolvement to meet a 75-percent regional value threshold. It also suggests new labor rules requiring “substantial work” to be set at wages of $16 an hour or more. The move is intended to help the U.S. and Canada bolster production and force Mexico to raise its own wages.

A significant portion of Mexican trade officials aren’t keen on either aspect, resulting in a mixed response overall. 

According to Reuters, industry groups aren’t celebrating the new proposal, either. Mexican Auto Industry Association president Eduardo Solis said the U.S. pitch was absolutely not acceptable.

“The percentage, the transitions, the restrictions. You have to understand the U.S. proposal is like putting padlocks on padlocks,” Solis said. “Imagine a car that does comply with the percentage, but doesn’t comply with all the core parts. Or you comply with core parts but don’t meet the steel and aluminum requirements. Or you comply with the first three but you don’t meet the wage requirements … It has the potential to influence investments, influence production in all three countries.”

The Center for Automotive Research in Ann Arbor, Michigan, estimates Mexican auto assembly workers average just below $6 an hour, with auto parts plant employees averaging under $3 an hour. Meanwhile, U.S. automotive employes average closer to $22 per hour and Canadians come in just shy of $20.

While the wage rules are ambitious, content requirements have been scaled back as a compromise. The previous overall regional value content proposal was set at 85 percent. But opposition from Canada, Mexico, and the automotive industry, resulted in U.S. negotiators scaling the plan back to 75 percent. The mandate is also no longer universally implemented. While certain high value parts (like engines and transmissions) would have to meet the 75 percent threshold, lesser parts would only be subject to today’s regional value threshold of 62.5 percent. Auto manufacturers would also need to purchase 70 percent of the steel and aluminum they use from North American suppliers.

The U.S. Alliance of Automobile Manufacturers has expressed concerns that the new deal could push business overseas.

Speaking of business overseas, let’s get back to Lighthizer’s trip to The People’s Republic. President Donald Trump’s 25 percent tariff on steel exported to the U.S. has really rattled China’s cage — despite the country not sending much of it to America. We’re not sure if the strategy, which also includes a 10 percent tax on aluminum, was boldly brilliant or totally insane. But it appears to have worked in getting China’s attention, in addition to other import tax proposals.

The country has since promised to open up the Chinese financial sector, purchase more natural gas from the U.S., lower its own tariffs, and allow foreign companies complete ownership of their own businesses after 2022. Lighthizer and company will be tasked to find out if these offerings are more than empty promises.

Still, the tariffs have caused a backlash abroad. The European Union threatened to retaliate if steel and aluminum tariffs took effect by imposing import levies on politically targeted American goods. The United States has been scrambling to cut amenable deals with allied nations. While the White House doesn’t want to alienate the countries it depends on, the president insists he wants to put an end to decades of unfair trading practices with foreign nations.

As a result, the Trump administration announced it has decided to stall most of its tariffs on imported steel and aluminum until at least June 1st. South Korean officials have already received a permanent exemption the tariffs as part of an updated free trade agreement signed in March. Australia, Argentina and Brazil also appear to have reached an agreement that would avoid import fees. Talks are progressing with Canada, Mexico and the European Union.

Japan, already subjected to the tariffs, remains committed to maintaining positive relations with the United States. While a major exporter of steel, most of Japan’s carbonized iron goes to Asia. What does make it into America is often of a high grade and the island nation feels confident the U.S. will take that into consideration when handing out tariff exemptions in the future.

We’re not entirely sure what the long term strategy is. For the most part, the biggest impact these metal levies have had on domestic car production comes from German manufacturers concerned the deal could mess with auto assembly in the Southern states. Everyone seems worried about a trade war but, thus far, one hasn’t manifested.

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15 Comments on “Here’s How Trade Negotiations Are Looking for the Month of May; Steel Tariffs Stalled Through June...”


  • avatar
    Lou_BC

    Forcing Mexico to ensure that companies pay a decent wage would be a step in the right direction when it comes to preventing companies from shopping for a banana republic that has zero problems with the exploitation of its populace by multinationals. That would have the indirect benefit of giving Mexicans a reason to stay home and stop sneaking into the USA.

    • 0 avatar
      bullnuke

      I’m not sure what we folks outside Mexico consider to be a “decent wage” for workers there. My former father-in-law was a campesino (farmer of LEGAL crops) in Michoacan and brought in $1500 US annually in the ’80s – he lived comfortably, raised a family of 15 children, and lived to age 96. Yes, they lived a simple life but wanted for nothing, always plenty to eat, a solid roof over their heads, and well clothed. He was considered to be earning a “decent wage” by the local folks and also a respected and accomplished citizen of the village of El Cajon, Michoacan. The same may be said of other countries I have visited over the years that manufacture vehicles as well as other products for North America such as Thailand. Five or ten dollars US a day goes pretty far in some places and is considered a tremendous gain for those folks and shouldn’t be minimized by we outside those areas as not being a “decent wage”.

      • 0 avatar
        redgolf

        and I was making $10 an hour in Michigan in 1980, that was a “living wage” back then, a wife 3 kids house & 2 cars, ok what’s my point, this, that’s all most companies are still willing to pay workers in the good ol USA! and no benefits! what a shame! oh! still better than Michoacán though!

    • 0 avatar
      Guitar man

      Umm, no that’s not what the provision is for.

      Normally there is a set limit to the wages you can count for “local content”. This is to avoid automakers using management and corporate salaries to count for the local content requirement.

      <>

      Reuters

  • avatar
    cdotson

    Technically steel is decarbonized iron. Raw iron input to the steel making process, like cast iron, has more carbon it in than even “high carbon” steels.

  • avatar
    ect

    China’s real response to the US tariffs on steel and aluminum has been to levy retaliatory tariffs on a range of US products, especially agricultural and high-tech – which will hurt important sectors that have voted Republican, but will not add to steel and aluminum production in the US.

    “We’re not entirely sure what the long term strategy is.” That’s easy – there isn’t one. Trump wanted to raise tariffs in an attempt (which will inevitably fail) to go back to a 19th-century industrial strategy. So, he’s raising tariffs on on basic commodities, while hurting the much more important high-tech manufacturing sectors that rely on these inputs.

    Doubling down on the past while impairing the future is never a good thing to do….

    • 0 avatar
      PandaBear

      Doubt it. His vote base is the de-industrialized white male so that’s why he say coal and renegotiate trade deal, and taking credits on jobs he “created” when it wasn’t his credit.

      He’ll do and promise everything, and let the others panic and deal with it in court (so he’s off the hook if the judge say one way or the other), then he can claim he kept his promise (hey, it’s the damn judge’s fault, not mine).

      When enough of his supporters “get what they wish for”, in terms of the retaliation, they’ll realize maybe that’s not what they wish for, so they can be more realistic.

      Not a Trump supporter, but that’s a brilliant strategy.

  • avatar

    China needs trade with USA more than USA needs China. So yes lets screw them communists.

  • avatar
    lne937s

    I think that it is unreasonable for us to ask another country to pay its employees in the automotive sector more than the overall minimum wage we set in this country. We can not claim that they need more than US minimum wage in a country with much lower cost of living if much of our country in other sectors makes less than that. Image if US agricultural goods were subject to a tariffs if farm labor wasn’t paid at least $16.

    But requiring all countries in NAFTA to meet US minimum wage would not be bad.

    • 0 avatar
      ect

      In Canada, there is no federal minimum wage, it’s a matter of provincial jurisdiction. In fact, minimum wage in most Canadian provinces is already higher than the US level – especially for hospitality workers.

      In Mexico, imposing a vastly higher wage structure to meet the US minimum wage level would result in severe economic disruption. The average wage would go from about $5 per day to $7.25 per hour, which would shock the economy into a coma.

      As bullnuke pointed out, it costs a lot less to live in Mexico than in the US, so simple wage comparisons are meaningless. One of the major purposes of NAFTA is to, over time, enable Mexico to upgrade its economy, which will improve incomes and create employment opportunity. This, in turn, will create new opportunities for US exports and reduce illegal immigration. The US does not benefit from impoverishing Mexico, quite the reverse.

  • avatar
    DougD

    The tariffs on Aluminum seem particularly ill advised, because the domestic American Aluminum industry will not be coming back easily.

    Because the biggest cost is the eletricity required for the reduction process, global Aluminum output comes from:
    The Middle East – Power from natural gas turbines (free fuel coming out of the ground)
    Canada and Russia – Power from hydroelectric development
    China – Power from cheap dirty coal

    The US mothballed nearly all their NW smelters during the California Energy Crisis, the companies resold their power contracts and made a killing. In the NE the electricity source was high quality coal which was too expensive to be profitable.

    The plants have either been mothballed for 20 years or bulldozed. Who is going to take a chance on a multi billion investment for an unprofitable situation temporarily buoyed by politics during a volatile era?

    • 0 avatar
      highdesertcat

      Everything you mentioned happened during a different time, with different economic policies and strategies in place.

      At one time in the past it was cool to outsource everything and turn America into a service-economy.

      So, things changed with the new sheriff in town.

      I’ll bet there will be other unorthodox changes while this guy is in the White House, and as long as he wins and gets it right for America, I’m fine with that.

      I mean look at the economic disasters that were the dark ages of 2009-2016. Gawd Almighty, how America lost, and lost and lost.

      Enough!

      GO TRUMP!

      MAGA!

      • 0 avatar
        DougD

        Well, here’s the bright spot.

        https://www.reuters.com/article/us-usa-trade-aluminum/missouri-aluminum-smelter-to-restart-after-tariff-utility-relief-idUSKCN1GM011

        I hope they can make a go of it.

      • 0 avatar
        ect

        “look at the economic disasters that were the dark ages of 2009-2016”

        Not so. The recession that started in 2007 ended in late 2009. The US economy grew in each of the 2010-2016 years. Manufacturing output went up every year. And by late 2016, the country was virtually at full employment. That’s not losing.

        The period 2004-2008, on the other hand, was a VERY different story. And not a good one….


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