NAFTA Deal Favors Unions, May Hurt Automakers

By Daily Editorials

October 5, 2018 4 min read

Publicly, labor unions are saying they are cautiously optimistic about the new trilateral trade deal President Donald Trump negotiated with Mexico and Canada. Privately, they ought to be doing backflips. It's not so clear how the Detroit automakers will fare.

The deal that would replace the North American Free Trade Agreement fixes much of what unions hated about the old pact, while making it harder for businesses to exploit cheaper foreign labor to lower costs and raise profits.

For the automobile industry specifically, the United States-Mexico-Canada Agreement is likely to raise production costs thanks to tougher content and wage mandates, and ultimately could make it even more difficult to build small cars in the U.S.

The sub-compact vehicles built in Mexico and sold in the U.S. might not be as easy to import duty-free, so American consumers will pay more for those fuel-efficient vehicles and may face a smaller selection. That could negatively impact sales, particularly in a cheap gasoline era.

In addition, for the moment, the pact leaves in place the 15-percent tariffs on the Canadian steel that U.S. automakers and other manufacturers rely on. That, too, drives up the price of finished vehicles.

So what do the unions, who hated NAFTA, get from USMCA? A lot.

For the first time, a trade agreement between the three countries mandates a minimum wage of sorts. At least 30 percent of cars must be made by workers paid at least $16 an hour. The threshold rises to 40 percent in 2023.

The wage is roughly three times the average manufacturing pay in Mexico. It's hard to imagine manufacturers in Mexico and low-cost Asian countries will triple wages for workers producing parts and vehicles. So more work will move into or remain in the United States and Canada.

Of course, the mandate could be a curse in disguise for unions if it encourages more automation as a means of keeping labor costs in check.

The deal imposes stricter environmental and safety restrictions on Mexican trucks transporting goods across the border, something that has long been on the wish list of the Teamsters union. It also requires that Mexico give its workers greater ability to form and join unions.

There are some other winners in the deal. Canada is happy because it would leave much of its complex dairy protections in place, though U.S. farmers will gain some additional access to Canadian consumers.

Canada and Mexico would be spared from the additional steep tariffs Trump is threatening on imported automobiles and parts.

There are stronger protections for intellectual property rights. Canada scored a victory in keeping the conflict resolution process largely intact.

Perhaps the best part of the deal is that an agreement was reached at all. When President Donald Trump blew up NAFTA, his administration didn't have much of a plan for replacing it, and negotiations between the three countries started out contentious.

The deal still must be approved by Congress and won't go into effect until 2020, and while well shy of perfect, it is better than a trade war between these three interdependent economies.


Photo credit: at Pixabay

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