By on October 1, 2018

2019 Lincoln Nautilus, Image: Ford Motor Company

Canada’s autoworkers feel pretty confident they’ll still have a job next year, as the free trade agreement reached by the U.S. and its northern neighbor Sunday night pretty much keeps the status quo alive in that country’s auto sector.

Just last week, with headway essentially absent from the trade negotiations, President Trump repeated his threat of levying a 25 percent import tax on Canadian vehicles. Such a tariff could easily have seen 160,000 jobs erased from the auto and parts manufacturing industries; perhaps more.

However, just because the industry came out all right in the end doesn’t mean the future is entirely rosy.

Tariffs remain on steel and aluminum imported into the U.S., including from Canada. Apparently, getting rid of those is a battle to be waged some other day. Trump claims the tariffs (25 percent on steel, 10 percent on aluminum) might be replaced at a later date by import quotas.

Still, Canada’s leadership and the president of its autoworkers union seem pleased, perhaps more so the latter individual. Bloomberg reports that Canadian auto parts suppliers, among them Magna International, saw some wind finally enter their slack sails today. Most are trading upwards. It helps that the country now finds itself bound by new content rules, with the NAFTA rule of 62.5 percent regional content now upped to 75 percent.

In the agreement, tariff exemptions were placed on 2.6 million Canadian-built vehicles exported to the U.S., which shouldn’t pose a problem. The country currently exports about 1.8 million vehicles per year from plants belonging to Honda, Toyota, and the Detroit Three automakers. Actually, it’s because Canada isn’t likely to ever top that number that has some feeling bummed about the country’s long-term auto health.

According to the Center for Automotive Research, Canadian vehicle production are expected to drop by 135,000 vehicles in the 2016-2020 period. In Mexico, still a lower wage jurisdiction despite stricter wage rules contained in USMCA, it’s the opposite. The country is expected to crank out an extra 850,000 vehicles in that time frame.

Nothing in the trilateral agreement changes the fact that it’s pricier to build cars in Canada. Keep in mind that the country at one time housed a Studebaker factory.

“There’s nothing in here that lowers costs for any of the three countries so compared with the rest of the world, all three countries are probably made slightly less competitive over the longer term,” Brett House, deputy chief economist at Bank of Nova Scotia, told Bloomberg. Dennis DesRosiers of DesRosiers Automotive Consulting called the agreement “a lot of theatre with “very little substance.” He added that higher regional content means added costs for all automakers producing in North America, which could hurt efficiency.

The Southern U.S. is frequently singled out as the jurisdiction with the most to gain from the new agreement, which is exactly what Trump was aiming for. Still, leaders from all three nations walked away claiming a win.

[Image: Ford Motor Company]

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24 Comments on “Car, Parts Companies Exhale, but Not Everyone’s Thrilled by USMCA...”

  • avatar

    I think we all knew that this was always about the theatre of it. Trump needed just enough to claim a win, and so now the final act can be played out and we can all go home and he can bring out USMCA come re-election time.

    • 0 avatar

      The “NA content” rule also has something in there about also having to pay workers at least $16.00/hr. I assume this is pointed at tier 1,2 and 3 manufacturers that all left Canada and the US for Mexico since NAFTA was created. Mexico will no longer be the “gotta go there” place to build a new factory. Canada’s cap leaves room for a lot more production. At least that’s how I read it.

      • 0 avatar

        You’re kidding, right? A wage of $16/hour is really nothing when we’re talking about unionized (or otherwise) auto workers in the U.S. or Canada. Mexican workers may be getting a nice raise, but they’re still going to be the cheapest place to manufacture/assemble.

        • 0 avatar

          Not necessarily, depends on many factors. Also I forgot to add, cars need 75% north American content, but if the parts were made by workers paid less than $16/hr they don’t qualify. There may be suppliers in Mexico that can’t get there (depending on the $$$ they signed the contract for by paying the staff pesos) and another supplier will have to pick up the slack, up here. It’ll take years to see how it all pans out.

  • avatar
    Arthur Dailey

    Even with the new regulations regarding wages and freedom to join an independent union, manufacturing costs will be lower in Mexico than in Canada. However due to the current exchange rates, some commentators have stated that manufacturing costs in Ontario may be lower than those in the USA. One other reason for this is that in Canada the employer does not have to the cost of medical care in the benefits package, due to the existence of universal healthcare.

    And it has been reported that the Studebaker plant in Hamilton actually operated, even after the closure of South Bend, at a break even point due to the excellent management practices of Gordon Grundy. With 700 workers, its break even was 20,000 cars per year. After Studebaker ceased producing engines, Canadian Studebakers were equipped with Chevrolet engines. Grundy also had arranged for Studebaker to become the importer of Datsun/Nissan vehicles, a deal which fell through due to interference from South Bend. Previously Studebaker Canada had imported VW’s and Studebaker Canada had been for a time the importer of Mercedes-Benz vehicles.

    • 0 avatar

      Reminds me of the 2008 Carpocalypse when Chrysler went bankrupt but Chrysler Canada was perfectly fine – the option of using other cars from a different manufacturer was on the table.

  • avatar

    This is looking pretty good. From WSJ:

    “To escape tariffs under the new deal, auto makers will need to include in their vehicles more parts made in North America and to pay higher wages, which will make cars more expensive. Also, companies will have less ability to challenge trade barriers erected by the participating governments.”

    (In your face, China)

    “On the plus side, U.S. farmers get easier access to sell wheat, poultry, eggs and dairy products into Canada. Also, the new deal reduces some trade barriers facing the technology industry and doubles the patent life for biologic drugs to 10 years from five. Encouraging technological innovation is a benefit to every country but is especially welcome in the country that leads the world in such innovation. In related news today, a U.S. scientist shared the Nobel prize in medicine for “a landmark in our fight against cancer,” which “takes advantage of the immune system’s ability to attack cancer cells,” according to the Swedish Academy.”

    Looks like the agreement was an improvement over the old one.

    • 0 avatar
      Arthur Dailey

      Increasing the intellectual rights on drugs to 10 years, will increase the cost of prescription drugs, as generics will not be available until after the expiry of these rights.

      The increased access to Canadian markets for American agriculture is rather miniscule (+ 4%?) and they must still pass the Health Canada hurdle as American dairy producers are allowed to use steroids and anti-biotics at levels not allowed in Canada.

      Still a deal was reached and China and Mexico will see their production costs increase, which I believe is a good thing.

      • 0 avatar

        Increasing the intellectual rights on drugs to 10 years ensures that the people who create new lifesaving drugs have incentive to continue to do so. Many of those companies are located in the US.

        Letting people make lots of money for inventing valuable things ensures that people will continue to invent valuable things. Individuals and companies do not produce drugs out of feelings of altruism. They do it for money. This is basic economics and human nature. Very few people start a rock band because they are dedicated to the music. They want money, fame and sex. Still, we end up with some great music.

        This rule will, as the article says, “Encouraging technological innovation is a benefit to every country but is especially welcome in the country that leads the world in such innovation. In related news today, a U.S. scientist shared the Nobel prize in medicine for “a landmark in our fight against cancer…”

        Companies invest billions in research and approval of new drugs. Then they have to give the formula away after only 5 years to let the little sniping freeloaders get rich off of their hard work. Five years is not enough time.

        • 0 avatar

          I would be ok with your concept of it actually worked that way. Unfortunately, most usable drugs are invented in labs that are sponsored by the federal government. Usually these are universities. The drug companies than buy the patents. Actually, the only real research most drug companies perform is finding the next restless leg syndrome that some defunct patent they squired will treat.

          • 0 avatar

            MBella, you’re right about Big Pharma’s shift from r&d to simply buying new drugs developed elsewhere, it’s been going on for many years now.

            Once they buy them, then the US taxpayer pays them a huge subsidy because Medicare/Medicaid are forbidden by law from negotiating prices with Big Pharma – they have to pay whatever price Big Pharma wants to charge.

        • 0 avatar

          “Increasing the intellectual rights on drugs to 10 years ensures that the people who create new lifesaving drugs have incentive to continue to do so. Many of those companies are located in the US.”

          Yeah…you’re off base on this one. Biologics are one of the most profitable (and expensive) classes of drugs in the market today. In 2017 the most profitable drug in the US was Humira, a biologic that brought in nearly $18 billion for Abbvie last year. One year’s supply of Humira costs over $50,000, and it costs that much because it works and it currently is patented. The third most profitable drug last year was Enbrel, another biologic that pulled in nearly $8 billion. The notion that these companies that are making tens of billions of dollars in profits from these drugs are somehow not being rewarded or incentivized for doing so is absolutely absurd. And that’s before you even get to the myriad techniques that the big pharma companies use to get extensions on expiring patents (like format-shifting) that prevent competitors from being able to create generics, long after the original patent has expired.

        • 0 avatar
          Arthur Dailey

          @thelaine, many other posters have refuted your argument, better than I can. However I would like to add 2 words to prove it is misguided: ‘Martin Shkreli’.

        • 0 avatar

          “Companies invest billions in research and approval of new drugs. Then they have to give the formula away after only 5 years to let the little sniping freeloaders get rich off of their hard work. Five years is not enough time.”

          And this is patently (ha) false. In the United States, they get 17 years from the date the patent is issued or 20 years from the date of the initial filing, whichever results in the longer term. Also, under the Drug Price Competition and Patent Term Restoration Act the drug company can file for up to an additional 5 years of “term recovery” to make up for the fact that drugs can spend several years being reviewed by the FDA after being patented but before being approved for use. This is why drug costs in the United States are the highest in the world.

          And that’s before you even get into dirty tricks like format shifting that allow them to file for an entirely new patent with fast-tracked FDA approval by changing the delivery method or changing an inert/inactive ingredient. For example, a drug manufacturer can take an enteric coated tablet that they have patented, and simply enclose the tablet into a gelatin capsule (aka, gelcap), call it a new drug and get a new patent on it that runs for another 17 years. Since they haven’t changed the active ingredients they can then get fast-tracked FDA approval, and so they are able replace a drug with an expiring patent with an essentially identical drug with an entirely new patent a matter of months before the original patent expires. And since the old drug gets taken off the market (aka, the “reference drug”) then competitors are unable to get approval to offer a generic form of that drug on the market. Instead they have to start the approval process at the beginning as if they were creating a new drug. This happens ALL OF THE TIME.

      • 0 avatar

        Arthur that hormone or whatever is used by less than 1 in 5 American dairy farms. They’re saying most of the milk they’ll be sending is wholesale anyway, you won’t even know. I would like to see some on the shelves though, our prices are 50-60% inflated due to supply management.

        • 0 avatar

          @ MoDo

          Yeah, I don’t see how allowing 3.6% worth of American dairy into Canada is going to help the consumer any. I’d be willing to bet a fair chunk of cash that we not see milk prices drop by a single penny. But that sure didn’t stop the farmers from raising a stink and Trudeau digging into our pockets to hand out compensation.

        • 0 avatar
          Arthur Dailey

          @Modo, numbers are contradictory, currently between 17% and 11% are the reported numbers of American dairy farms using rBST or its derivatives, all of which are banned for use on dairy cattle in Canada.

          The following is from a somewhat biased site, but still pertinent:
          Bovine growth hormone, or bovine somatotropin (also called bGH, rbGH, bST, or bST), is given to cows to make them mature faster and produce more milk. Unless the milk you buy in the USA is organic, or labeled “bGH-free,” it may contain the hormone.

          The most popular difference between the two countries is the use of recombinant bovine somatotropin, or rBST. What is that? Well, Health Canada states that rBST is a synthetic version of a naturally occurring growth hormone. It is approved for use in the USA to increase the production of milk in dairy cattle, but is illegal in Canada.

          Another difference is that our maximum allowable Somatic Cell Count (SCC) is 400,000. In Canada, each load of milk is tested to ensure it’s below that standard. In the USA, the national standard is 750,000.

          Our average farm size in Canada is 85 cows, while the US is about 225.

    • 0 avatar
      Big Al from Oz

      I really don’t see much in this for the US. The finer print will show how and what has been achieved. So far the cost of vehicles will rise, drugs will rise and the access for wheat, etc is marginal. I mean, how much US wheat will be sold in Canada, when Canada is an exporter of wheat? Your argument is sort of like stating “we’ll sell ice to the Eskimos and crude oil to the Saudis”.

      As for your innovation argument has been blown away, just the very thought of tariff means innovation is on the back burner and protectionism is it’s replacement.

      This link is more to the truth. Trump has to make concessions so Trump can focus a gather support for his Chinese Trade Tirade. So, far he’ll only have some help from Canada (if any) and Mexico who will gain from Chinese manufacturing transferring to Mexico.

  • avatar

    The name change: BIGLY!
    Most details: Bigly?
    Timeline for actual/if ever implementation: bigly???

    • 0 avatar

      Still boggles my mind that people don’t know about the phrase “big-league,” it’s like a teenager singing the wrong lyrics to a song they heard as a toddler and refusing to accept the correct words.

  • avatar
    Big Al from Oz

    It seems Trump made concessions and not much has changed. The answer to how effective Trumps “deal” is will come after a couple of years or so when data can be gleaned and scrutinised.

    It seems to be a lame deal, a nothing, other than increase the costs of goods to all in NAFTA. Not so bright from Trump.

  • avatar

    Hunmira brought in $18 billion for Abbvie in 2017? Really? I’d like to see where you got that number. I happen to be a long time Abbvie stock holder and a biotech investor. In 2017 Abbvie’s net income was a little over $5 billion, 65% of which came from Humira.

    “…most usable drugs are invented in labs that are sponsored by the federal government.” Citation for this? It’s false.

  • avatar

    This is all about Chinese parts. Billions in Chinese car parts are used in NA vehicle production. The new rules are intended to restrict that.

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