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Main benefit from NAFTA replacement deal? End of auto industry uncertainty

Eric D. Lawrence, Detroit Free Press on

Published in Business News

DETROIT -- Disaster avoided.

That's how one analyst described the apparent deal between House Democrats and the Trump administration to move forward on revising a trade agreement among the United States, Canada and Mexico. The news of progress to replace the North American Free Trade Agreement, an effort that had appeared stalled until recently, was announced Tuesday by House Speaker Nancy Pelosi, on a day when impeachment developments seemed likely to overshadow everything else in Washington.

"We are relieved that our hyperpartisan leadership managed to summon the will to do the right thing and avoid what could have been substantial disruption to the auto industry," Jonathan Smoke, Cox Automotive's chief economist, said Tuesday. "Many may view this as an early holiday present, but I see it more like a disaster avoided. Should kids be excited that their squabbling parents decided not to burn their house down? Disaster avoided, yes. Holiday present? Not quite."

A return to certainty for an industry that relies on years-ahead planning is considered one of the main benefits of a finalized United States-Mexico-Canada Agreement. President Donald Trump had pushed aggressively for a NAFTA replacement, but labor groups in particular had not been pleased with what had been negotiated in the USMCA.

Smoke noted the agreement's limitations as Cox provided data showing that "nearly a quarter of all new vehicles sold in the U.S. are assembled in either Mexico or Canada," 15% from Mexico and 10% from Canada.

"Ratifying USMCA ironically doesn't change much. Rather, it provides for stability in North American vehicle production, which is crucial for the auto industry and the U.S. economy. Costs will likely rise modestly over time due to the higher content and wage rules, but for now this is about finally reducing some uncertainty that has been weighing on the industry for almost two years," Smoke said, cautioning that the threat of new auto tariffs remains.

 

RELIEVING AMBIGUITY

Kristin Dzizcek, vice president of the Industry, Labor & Economics Group at the Center for Automotive Research in Ann Arbor, said the deal, when it is finalized, makes the investment path for the auto industry more certain, a key issue because the Detroit Three in particular made significant commitments in the United States as part of 2019 contract agreements with the UAW. Union members at Ford and General Motors have already ratified their deals, leaving only those at Fiat Chrysler Automobiles to finish the process this week, unless they vote the UAW/FCA agreement down.

"There's a lot of decisions that have to be made, and until this is all signed, sealed and delivered and in place with a target start date, there is some ambiguity" that would go away once things are final, Dzizcek said.

The deal, however, will put some competing pressures on the auto industry, in part because of requirements for more auto content to be produced at a higher wage rage.

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