Balancing Trade and Tariffs

Highs and Lows of Americas Agreement

By Matthew Bey, Stratfor

It has been six months since the United States-Mexico-Canada Agreement, or USMCA, was signed, and the ratification process has begun in all three countries. But as with all trade agreements and trade issues, there is good news and bad news.

Despite concerns that U.S. President Donald Trump would place significant trade barriers within the agreement that could reduce trade, for most industries, the USCMA is only a minor update to the status quo and should it be ratified, will not cause major repercussions.

This is not true, however, for the auto sector or some narrow parts of the agricultural sector. Both were focal industries for the White House. The rules of origin for goods to qualify for USMCA trade benefits have been significantly tightened for the auto sector. In order to qualify, the regional content level of goods must be 75 percent – up from 62.5 percent. Moreover, 40 percent to 45 percent of the value must be produced by workers with a wage of at least $16 per hour. This would disincentivize using cheaper Mexican labor and incentivize sourcing more parts from NAFTA countries.

But there is a potential side effect. President Trump has threatened to place 25 percent tariffs on cars coming into the U.S. – and threatened to eventually place them on cars coming from Mexico and Canada that do not conform to USMCA-standards. This stance has proven deeply unpopular and may not last beyond his first (or potential second) term. For many automakers – especially companies that source components outside North America – simply not conforming to these tighter USMCA standards and paying the U.S. typical tariff of 2.5 percent on auto imports might be desirable.

Broadly speaking, the USMCA is likely to have a small net positive impact on North American economies. This is not necessarily because of the agreement’s details per se, but rather the certainty that the agreement brings. But therein lies the bad news. President Trump’s threat to impose up to 25 percent tariffs on all Mexican goods due to perceived lax immigration controls, looms large over Mexico. This time, a quick deal was made. But given that one of President Trump’s signature domestic issues has been stricter immigration enforcement, the risk of that threat re-emerging ahead of 2020 elections remains high. This peril has undermined the certainty that it was hoped the USMCA would bring.

Trade is, of course, the other signature issue for Trump. Despite all three USMCA parties starting their own respective ratification process, Trump has an uphill battle on Capitol Hill to get the deal passed quickly. House Speaker Nancy Pelosi will not give him an easy win, and if Trump tries to force the issue, she may well suspend Congressional rules that allow for an expedited approval process. This could raise the prospect of Trump triggering a six-month NAFTA withdrawal process as a means of forcing Pelosi’s hand. Thus, regardless of the limited benefits it brings, the future of the North American trade relationship remains fraught with political risk.  

Matthew Bey is senior global analyst for Stratfor.

Image credit: Ron Przysucha/ZUMA Press/Newscom