With Global Supply Chains in Crisis Mode, Auto Makers Request Delay of New Trade Deal
As recently as two months ago, leaders in business and government were enjoying a sigh of relief as the new North American Trade deal was set to go into effect and remove uncertainty created by the Trump Administration’s trade wars. That optimism quickly dissipated in the past couple of weeks, as the new United States-Mexico-Canada Agreement (“USMCA”) quickly lost momentum because of the Coronavirus pandemic.
Last week, shortly after Canada became the last member state to ratify the USMCA, both U.S. borders closed to nonessential traffic. This does not include regular commercial traffic via truck and rail that is essential to the more than $1.5 billion in daily trade between the U.S. and Mexico. Acting DHS Secretary Chad Wolf also provided assurances that North American trade would not be affected by the agreement to partially close the borders:
“Let me be clear that neither of these agreements with Canada or Mexico applies to lawful trade or commerce. Essential commerce activities will not be impacted. We will continue to maintain a strong and secure economic supply chain across our borders.”
Sea ports like the Port of Houston also remain open for business.
Even though the North American commercial infrastructure is still intact and not subject to restrictions, the economic toll of the Coronavirus is bringing much of this traffic to a halt.
“We’ve already seen it get more expensive for truckers to take loads of goods from the border up north,” Rep. Henry Cuellar (D-Texas) told POLITICO.
One industry that is particularly affected is the automotive industry, which largely depends on North American supply chains. Auto makers, including Detroit companies, Honda, and Toyota, suspended production in North America at least until March 30 to slow the spread of the virus. Morgan Stanley analysts said in a note last Thursday that they were evaluating an impact of as much as a 90% drop in U.S. sales over three months. The industry letter said automakers had seen a “steep drop in retail sales over the last 10 days.”
Car movers, like the Oslo-based Wallenius Wilhelmsen, were already expecting a slow year before the virus went global, due to the U.S.-China trade dispute and a slowing global economy. After the virus went global, Wallenius Wilhelmsen decided to cut its fleet by 14 vessels as automobile production and demand plummet.
Because of these events, the Auto Industry is requesting that the government delay implementation of the USMCA until next year, a request that is facing resistance from the Trump Administration that has been touting the USMCA as a key election-year accomplishment.
“When you add to that the Covid-19 crisis, this is really beyond understanding that the administration is trying to do this,” said Ann Wilson, senior vice president at the Motor & Equipment Manufacturers Association. “If you force us to try to comply by June 1, we will not comply, and tariffs will be unnecessarily paid.”
The new UMSCA rules include the following key new requirements that we discussed in our prior USMCA article: (1) 75 percent of a vehicle’s content be produced within North America, an increase from 60 to 62 percent under NAFTA; and (2) 70 percent of vehicles’ aluminum or steel come from the three countries and that 40 to 45 percent of auto content be made by workers who earned at least US$16 an hour. Neither of these were included in the existing North American Free Trade Agreement (“NAFTA”), and they are likely too burdensome and unrealistic for the industry to implement under the current circumstances. If there is no delay to the USMCA implementation and auto makers do not comply, they will have to pay normal tariffs on auto imports, which could further strain auto sales.
Despite the Trump Administration’s reluctance to delay the USMCA, he has been changing his tone on a variety of other issues as the crisis worsens, including his recent decision to invoke the Defense Production Act to mandate that companies manufacture much-needed medical supplies. Delay of the USMCA also has some powerful allies in Congress, including Senate Finance Committee Chairman Chuck Grassley (IA), who said the industry has “a good argument” for a delay.
At a time when news is changing at unprecedented speeds, it is difficult to forecast the USMCA rollout or the auto industry at large. The industry is in for a rough road ahead, but one of our greatest hopes is that governments will put politics aside and move fast enough make the road ahead a little less bumpy.
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