I really am not sure where to begin with this latest farce, Trump’s announcement yesterday of a supposed US-Mexico Free Trade Agreement. Of course there was the farce of him trying to make the announcement with a live phone call between him and outgoing Mexican President Pena-Nieto (to be replaced on Dec. 1 by leftist populist Obrador), which took awhile to get going. There is the problem that some details appear to be unresolved, but most importantly that Pena-Nieto insisted four times that Canada needed to be part of the deal for it to be accepted in Mexico, including with his last words to Trump, while Trump seems fine with just having a tow-nation deal leaving Canada in the dust, or perhaps hoping that Canada will simply be forced to sign onto this deal as is, which it might. But for Congress to approve it prior to Obrador coing into office, given Congress’s 90-day waiting period on such legislation, Trump has four (now only three) days to get Canada to sign on. Prospects for that and Mexico also passing it before Dec. 1 do not look too good, maybe not much better than the prospects of actually getting North Korea to denuclearize.
So what is in this deal? Most of the publicity has been about its automobile section, which some in the US hope will increase automobile production in the US, although that is not definitely the case. The two main parts are to increase the portion of parts made in North America from 62.5% to 75% in order to avoid facing tariffs. This apparently would affect Toyota, Nissan, and Mazda most severely, but hardly any other non-North American producer. Maybe some of those companies might shift some production to North America, maybe at least production of parts, but there is no reason to believe any such increase will go to the US rather than to Mexico, although probably some would.
The other part is that at least 40-45%% of production must come from workers earning more than $16 per hour. Offhand that looks like it might help US workers. However, average US auto wages are $22 per hour while Mexican average auto worker wages are $10 per hour. This may help Mexican workers get higher wages; but, it is not obvious it will do much for US auto workers.
Of course this is the big stick Trump is using on the Canadians: if they do not get on board with this agreement, they will face tariffs… But this is a potential mess given the complicated supply chains between the Canadian and US auto industries, and it is notable that the US auto industry has not supported imposing tariffs on foreign cars, precisely because of this.
Trump wants to rename the agreement as “NAFTA” supposedly has “bad connotations.” Well, why would it not with him having repeatedly denouncing it as “the worst trade deal ever”? But the hard fact is that it is still legally in place, and apparently he cannot unilaterally just end it. Congress must approve, and apparently there are many in Congress not willing to do that without Canada being in place for any replacement agreement. Trump can call it whatever he wants, but at best this is a minor change in the still-existing NAFTA.
Now as a matter of fact there are some parts of this agreement that look like improvements. These would include tightened environmental and labor union rules for Mexico, as well as stronger property rights protections for US intellectual property, although some would question if this latter is really so great: making Mexicans pay more for US Big Pharma drugs? Also, the bottom line of the auto part of this would raise car prices for consumers in both nations.
However, here is the great irony. Both Mexico and Canada have already agreed to these environmental, labor, and intellectual property rights rules. They did so when they signed on to the Trans-Pacific Partnership (TPP) agreement, which in fact both of them are still parties to. Trump removed the US from this almost immediately after becoming president, also denouncing the TPP as something just awful, even though the US led the negotiations for it to come about. So the US is out of it, but all the other 10 nations, including both Mexico and Canada, have followed Japan’s leadershp to continue with the agreement and make it happen. So accepting these conditions on the part of Mexico was not a big deal at all. They have already done so, just not with the US.
Which leads us to a bizarre bottom line. With NAFTA actually still in place, and with these portions of this agreement already in place for Mexico (and for Canada if it joins in) in the TPP deal, this makes rhis agreement basically a marriage bwtween NAFTA and the TPP, both agreements that Trump has denounced, but now he is keen on a combination of them. The only part of it that cannot be characterized as that is the automobile part, but if Canada does not go along with that, the whole thing will probably end up going kaput anyway, much like the North Korean denuclearization. But, hey, globla stock markets rose on the news, presumably on the grounds that it means Trump may be less likely to initiate a full-blown global trad war in the near future, whatever becomes of this odd possible NAFTA-TPP going by whatever new name.
Addendum, next day: I have removed the erroneous “Free” from Trump’s proposed title of the agreement, with Mexico not yet accepting this title. Also, I corrected an error regarding the percentage parts requiring higher paid workers. It is 40-45%, not 50%.
Please note that I have made two corrections to my original post, which I hope somebody will replace this version with. The first is that “Free” has been removed from the title. That isnot part of Trump’s proposed title for the agreement, which Mexico has not accepted anyway.
The other is that the percentage parts needing to use workers paid at least $16 per hour is 40-45%, not 50%, as I erroneously said initially.
Somebody changed it!
“But, hey, globla stock markets rose on the news, presumably on the grounds that it means Trump may be less likely to initiate a full-blown global trad war in the near future, whatever becomes of this odd possible NAFTA-TPP going by whatever new name.”
I think that it shows that a way out of the trade war is simply to tweak agreements and then let 45 claim to have negotiated them. Because it is all about him taking credit for a deal, not what is in it.
However, average US auto wages are $22 per hour while Mexican average auto worker wages are $10 per hour.
My ignorant suspicion is that the average isn’t informative (at least for the U.S.) because wages are something like bimodal (e.g. new union-old union, union-nonunion or even employer-contractor). If the median wage is $13.50, then a $16 floor would be helpful.
Welcome to Angry Bear. First time comments go to moderation to weed out spammers and advertising. Under the union contract new employees start at $14/hour. I suspect the average is higher.
I still can’t believe people think Mexicans are getting “16$” hour min wage for auto workers in this deal. They don’t. It is barely a increase from 4$ a hour they have now.
It is a crap deal that basically borrows from the Obama renegotiation of NAFTA(yes, Obama renegotiated NAFTA via the TPP, though they never said so, due to the fact they knew laborers wouldn’t like it).
No wonder the “this time of year low volume market” loved it.
Do not forget that essentially all of the Canadian auto industry is owned by the US big three auto firms. So trump is solving the trade deficit by slapping a tariff on US firms. Why am I not surprised at the logic behind this.
A double check finds that Mexican average wages in auto assembly plants are about $8 per hour and in auto parts plants are about $4 per hour.
One estimate says about 30% of Mexican auto-related production affected. This could backfire if costs of meeting the requirement aree greater than the 2.5% tariff that would be imposed. Mexixans might purchase fewer auto parts from US and outsource elsewhere more, leading to a fall in US auto parts production and employment rather than an increase. Not even clear there is a gain from this deal for the US auto industry, especially workers in it.
Many of the components going into automotive assemblies are made in the US first, carted across the border via truck (which is getting more difficult due to customs/ICE), assembled with other components, and shipped back across the border to the US. Wire harnesses which are Labor intensive is one example of this. On US product, the Bill of Material is already determined and there is no sourcing elsewhere unless weeks/months of validation of the new component are accomplished. The 2.5% tariff might not apply to US content in Mexico assembled product. In order to reap some of the Labor cost benefits there has to be a percentage of local content in the assemblies. Each year a NAFTA BOM is submitted which details Country of Origin. US automotive contracts Mexican assemblers. Hirschman connectors has a facility making connectors in San Pedro, Mexico. Marquart Switches is located in Mexico City. Both make components used in automotive, also qualify as Mexican content in the NAFTA COO BOM, and are close to the sources of manufacture.
US companies and citizens also can not directly own land within 100 kilometers of the border. It goes into a trust instead which places Hirschman and Marquardt in less restricted operations.
Not to defend Trump or his tariff, but if the goal is to move manufacturing jobs from Canada to the US, slapping a tariff on cars made in Canada by Canadian workers might have some superficial logic, no? Regardless of who owns the corporation.
The bigger issues between US and Canada are dairy, lumber, and th existing steel and aluminum mtariffs. Putting tariffs on Canadian autos and auto parts might increase US jobs, but not necessarily. This is because of the complicated supply chains going both ways across the border both ways. So, if we put tariffs on Canadian cars, that will hurt US auto parts oridycers who supply the Canadian auto assembly plants. There is a reason the US auto companies have opposed auto protectionism throught this stupid trade war of Trump’s.
“complicated supply chains going both ways” Yep!