1 Oct 18

Good-bye NAFTA, hello USMCA

The automobile Rules of Origin remain in place under the new deal between the United States, Mexico, and now Canada known as USMCA, a region that trades more than US$1 trillion annually.

Canada joined in on the agreement late Sunday evening following a previous accord between the Trump administration and Mexico more than one month prior. USMCA scraps the 24-old North American Free Trade Agreement (NAFTA).

As the new agreement should be signed by the end of November, it should be ratified by Mexico’s outgoing President Enrique Pena Nieto who leaves office on December 1st. The U.S. Congress, however, may not ink the deal until 2019.

Over the weekend, the value of the currency in both Canada and Mexico strengthened. While the Canadian loonie rose 1.3% to 0.78 against the U.S. dollar, the Mexican peso rose 1.9% to 0.54.

Assembled trucks ready for delivery at GM's Chevrolet Silverado and Sierra pickup truck plant in Fort Wayne, Indiana (Source: Shutterstock) 

Automobile Industry
Under USMCA, to qualify for tariff-free trade, the percentage of vehicle components which must be manufactured in North America has been increased to 75% from 62.5%. Moreover, 40-45% must be manufactured by workers earning at least US$16 per hour, well-above the average salary for Mexican autoworkers.
Although the new Trump-designed rules are focused on encouraging manufacturers to build cars in the U.S. and correlatively Canada, some experts are unsure that this will actually happen. For one, the minimum wage may be tough to actually enforce in some areas.

Moreover, if they are enforced, production may end up being too costly and this could result in automakers moving production to outside the tri country region. Only time will tell.

The new rules are expected to be put in place as from 2020, with a gradual transition period until 2023. For more on how it effects Mexico, visit here.

Authored by: Daniel Bland