If Trump tears up NAFTA: what does that mean for Canadian car buyers?
For many readers, the impacts and implications of trade agreements on your businesses may not be easy to discern.
In observing the news for the last many months one would be aware that there are huge implications for the “automotive industry” were the North American Free Trade Agreement (NAFTA) to be terminated by U.S. President Donald Trump.
While at this juncture, that remains a possibility, based on the latest intelligence it would seem that there is now more of an interest in attempting to negotiate a new NAFTA 2.0 rather than simply terminating the old agreement.
Regardless, while it may be clear that the NAFTA re-negotiation process has huge implications for manufacturers, it is a little more difficult to see how the abrogation of NAFTA or changes to RVC requirements would impact other segments of the automotive industry — and ultimately consumers.
Consider that for the last quarter-century manufacturers have been used to dealing with, and abiding by regional value content (RVC) percentages of 62.5 per cent. That means that a vehicle must have 62.5 per cent of its content come from either Canada, the United States or Mexico in order for that vehicle to earn preferential tariff free access to move between the three countries.
If there is no NAFTA, or if we contemplate for a moment the adoption of the American proposal to increase the RVC to 85 per cent combined with 50 per cent U.S. content, what would that mean for dealers and their customers?
Before we explore that question, let’s not forget that the renegotiation of NAFTA is not the only trade game in town. Over the last few years, Canada has negotiated trade agreements with Korea and the European Union.
Traditionally trade agreements have been about expanding markets and removing barriers for the production and sale of products in those expanded markets.
Additionally, at the end of January, Canada indicated that it was prepared to move forward with CPTPP or Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which is the new name for the old Trans-Pacific Partnership agreement minus the United States.
You will recall that one of the first actions that President Trump took after his inauguration last year was to pull the United States out of the then TPP which left the other eleven countries with the choice to either finalize the agreement without the United States or scrap the agreement all-together. Work on the agreement continued in the absence of the U.S.
Progress on the CPTPP, however, came only after the Trudeau government left its other CPTPP partners standing at the altar last fall when the Prime Minister did not show up at a signing ceremony for the agreement citing the need for additional work to be done before it would be acceptable to the Canadian government. With that work having been undertaken in the intervening period of time, Canada moved forward with the agreement.
All well and good — you may be thinking — but how does any of this impact me and my business? Fair enough.
Traditionally trade agreements have been about expanding markets and removing barriers for the production and sale of products in those expanded markets.
For example, when I was three years old, the Canadian and American governments initiated their own sectoral free trade agreement in the auto sector called Automotive Products Trade Agreement (APTA) better known as the Auto Pact.
That agreement provided for the duty free movement of vehicles and parts between Canada and the United States so long as certain conditions were maintained. The Auto Pact encouraged the location of vehicle assembly facilities in Canada and built efficiencies and economies of scale into the production process by allowing plants on either side of the border to produce vehicles for, and sell vehicles into, the larger Canada/U.S. market.
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This provided a significant advantage to Detroit-based automakers who had a pricing advantage in the Canadian marketplace because of the elimination of tariffs — which were significantly higher at the time than today’s 6.1 per cent — vis-à-vis vehicles being imported into Canada from countries.
And the result? The Canadian auto manufacturing industry at the time was modernized and improved its efficiency, while at the same time Canadian consumers had access to a much broader range of vehicles that were better built at relative prices that were lower than what they had experienced before the signing of the Auto Pact.
The subsequent Canada US Free Trade Agreement signed in 1988 effectively provided the free trade provisions that had existed in the Auto Pact since 1965 to all sectors within the economy, and that agreement was superseded by the NAFTA Agreement which included Mexico in 1994.
Now the NAFTA is being reassessed by the U.S. government (despite employment and production statistics to the contrary — at least in the automotive sector) that seems to believe that NAFTA has not benefitted the U.S. economy especially U.S. manufacturing and associated employment.
Should the NAFTA renegotiations be unsuccessful with the President deciding to terminate the agreement, it is unclear what would happen after the termination.
Any withdrawal from NAFTA would still have to be ratified by Congress and if the withdrawal made it through that process, it is also unclear whether the Canada U.S. relationship would then revert to the provisions of the Canada US FTA.
This is all speculation at this point but the ultimate effect of having no trade agreement with the United States is that vehicles coming into Canada from the U.S. would be significantly more expensive — owing to both the re-imposition of the 6.1 per cent MFN tariff on vehicles imported from the U.S. compounded by the roll up of additional duties from parts that exported from Canada or Mexico into the U.S. and incorporated into a vehicle that was subsequently exported to Canada from the U.S.
With companies from all four jurisdictions now competing from a level, tariff-free playing field Canadian dealers and consumers should experience a greater degree of vehicle choice at highly competitive prices.
Thus, many of the efficiencies and cost reductions that I mentioned earlier would be lost. With 85 per cent of vehicles sold in Canada being imported from somewhere else — the vast preponderance from the United States — it seems evident that both dealers and consumers would be facing higher prices for vehicles coming from factories in the U.S. to be sold into the Canadian market. Objectively, then, a renegotiated NAFTA is obviously the best outcome.
If it can be accepted that the NAFTA was very beneficial for all three economies, it seems reasonable, by extension that the other trade agreements Canada has signed with Korea, the European Union and now with the other TPP 10 countries (the most significant of which is Japan) should prove beneficial for Canada and Canadians as well.
With those three agreements and the NAFTA, there will eventually be no tariff applied to any vehicle entering the Canadian market from the EU, Korea, Japan or the United States.
With companies from all four jurisdictions now competing from a level, tariff-free playing field Canadian dealers and consumers should experience a greater degree of vehicle choice at highly competitive prices.
Conversely, for vehicle manufacturers in Canada, the opportunity with the Canada/EU CETA and the CPTPP provides the five companies manufacturing here (FCA, Ford, GM, Honda, and Toyota) with a competitive advantage vis-à-vis facilities in the United States. They can exploit the EU and south-east Asia opportunities that facilities in the U.S. do not enjoy owing to Canada’s “first mover” advantage with both the CETA and the CPTPP.
Whether these companies will take advantage of this opportunity depends on both business conditions and their willingness to look beyond North America for new markets where it makes sense to do so.
Therefore, despite what naysayers may say, my personal belief is that the expansion of trade via rules-based trade agreements will be beneficial for vehicle manufacturers located in Canada and for Canadian dealers and consumers.
