Trump's New Trade Deal Could Affect One in Three Imported Vehicles From Mexico: Report

The subtle changes scream 'I can't believe it's not NAFTA.'

via Getty Images

Swept to the backburner of American economics has been the automotive industry's looming time-bomb: tariffs. In an attempt to diffuse the situation, United States President Donald Trump has negotiated with Mexico's government to pen a new commerce deal, called the "United States-Mexico Trade Agreement," and it means a shift in how money in the automotive market would change hands.

A key takeaway that is expected from the agreement, if ratified in its current state, is the increase of the existing rules-of-origin requirements. This would require vehicles imported from Mexico into the United States to have at least 75 percent of their materials sourced from Mexico or the United States, raising that limit from the existing 62.5 percent.

Data assembled by Bloomberg suggests that only one in three vehicles would be affected by this change, meaning that 70 percent of vehicles imported from Mexico are currently compliant with the rules-of-origin requirements and call for no change.

Another interesting detail released is a new stipulation regarding pay requirements. On top of the rules-of-origin, at least 40 to 45 percent (this number hasn't yet been concreted) of the factory workers must be paid $16 per hour—double the average factory worker pay in Mexico and quadruple the average of parts companies. Data is not available to determine the impact that this may have on worker pay or make additional vehicles eligible for tariffs, if any.

Vehicles that fail to meet these requirements by 2024 would be subject to the existing U.S. automotive tariff rates of 2.5 percent for passenger cars and 25 percent for trucks.

In 2017, Mexico exported 2.33 million vehicles to the U.S., according to data from CNBC, where 75 percent would be sold in the country. In an exclusive from Reuters, the trade agreement reportedly contains stipulations to collect up to 25 percent of the vehicle's value in “national security tariffs" should the volume of imports exceed 2.4 million units per year, or auto parts exceeding valuations of $90 billion annually.

The announcement of a 25 percent tariff under the name of "national security" could hint at the results of the soon-to-be-released study conducted under an order from the Trump administration to investigate if the importation of vehicle or raw materials posed a credible threat to national security.

Automakers are reportedly concerned that if the United States does proceed with the protectionism tariffs under what some to believe to be a farce of national security that it will cost American workers hundreds of thousands of direct and upstream provider jobs, as well as raise prices for consumers looking to buy their next vehicle. Retaliation tariffs from other countries who import vehicles from the United States are expected to exacerbate the loss. As the name implies, Canada has not yet been included in the tariff talks this round.

In 1989, the U.S.-Canada Free Trade Agreement was birthed as the result of a bilateral trade negotiation pact, and shortly thereafter, in 1991, Mexico joined in the talks to birth the 1994 agreement coined NAFTA. Now, in 2018, the newly proposed agreement between the U.S. and Mexico feels like NAFTA-by-any-other-name, as it reads more as a revision than a new deal.

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