Proposed NAFTA Auto Rules Could Hurt U.S. Sales, Not Help

Revisions meant to help the auto industry may have the opposite effect due to higher prices.

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Renegotiation of the North American Free Trade Agreement intended to help the auto industry in the U.S., Canada, and Mexico may result in price increases for new cars, and that could hurt sales, reports BNN.

After threatening to withdraw from NAFTA, President Trump has instead agreed to renegotiate the terms of the agreement with Canada and Mexico. One of the major concerns related to the auto industry is the shift of manufacturing to Mexico, where wages are significantly lower and the savings are passed on to customers. But this has resulted in a drop in employment in U.S. and Canadian factories, and the Trump administration is concerned about protecting American jobs.

Negotiators are working on a plan that would require more auto parts to be made in North America, the use of more North American steel, and to favor high-wage jurisdictions for production, meaning the U.S. and Canada. A 2.5 percent tariff is proposed for vehicles that do not comply with these requirements.

Unfortunately, a study by the Center for Automotive Research shows that while these changes are intended to help the auto industry, unintended consequences could have the opposite effect. At least 46 vehicle types currently built in North America do not meet the proposed standards. The cost of bringing these vehicles into compliance would be higher than the 2.5 percent tariff meant to encourage it. Manufacturers would be better off simply paying the penalty than making any changes. One way to more strongly encourage compliance with the new standards would be a higher tariff, one that would be more expensive than the cost of compliance. But in either case, the increased cost would simply be passed on to consumers, resulting in higher prices for vehicles.

"The tariffs would add between $470 and $2,200 to the cost of these particular vehicles...(and) the result would be an estimated loss of 60,000 to 150,000 annual U.S. light-vehicle sales," the report says. 

So while the proposed terms are intended to help the auto industry, they would, in fact, hurt it as a result of lower sales and reduced profit.