New rules for auto manufacturing. The new agreement includes a major goal of the Trump administration: tightening the rules of origin for autos to qualify for zero tariffs.
A car or truck imported into the U.S. from Canada or Mexico will only qualify for zero tariffs if 75 percent of its components are manufactured in North America. The threshold under Nafta had been 62.5 percent, low enough that a lot of manufacturing work on autos was being done outside of North America. This is one of the win-win-win provisions of the agreement since it could result in more manufacturing being done in Canada and Mexico rather than Asia.
Another all around win is the implementation of a minimum wage for zero tariffs autos. Initially, at least 30 percent of the work manufacturing cars and trucks will have to be done by workers earning $16 an hour. That threshold moves up to 40 percent for cars by 2023.
That could push wages up for Mexican workers in the longer term. It is also likely to act as a cap on the amount of work on cars that will be done in the lowest wage areas of Mexico. As a result, more of the manufacturing work that moves into North America because of the 75 percent rules of origin threshold will likely be done in the U.S. and Canada. Politically, the higher rules of origin threshold and wage requirement could help the Trump administration win support for the plan from labor unions and Democrat lawmakers.
Higher auto tariffs could play an important role. Although the 75 percent rules of origin requirement is a major accomplishment, there may be less than meets the eye unless the the Trump administration follows through on plans to raise auto tariffs.
The current U.S. tariff on cars is just 2.5 percent. As a result, many automakers may choose to accept the penalty for not meeting the North American content requirement rather than pay the higher wages repatriating manufacturing jobs would require. They’ll just pay the 2.5 percent duty and keep making car parts in Asia.
The Trump administration’s trade team is aware of this weakness, according to people familiar with the thinking inside the White House. Fortunately, the administration is currently considering raising tariffs on cars. That would make the rules of origin changes far more effective.
One person involved in the negotiations with Canada told Breitbart News that the decision to replace Nafta before imposing new auto tariffs was important strategically. If the administration had announced the higher tariffs first, importers would have been alerted to the higher costs and fought harder against the rules of origin, the thinking went. Now that the rules of origin are in place, the higher tariffs can be pitched as a way of simply making them effective.
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