What Happened
Negotiators from the United States and Mexico have reached a breakthrough on a key NAFTA sticking point. For months, Mexican and U.S. trade teams have been locked in talks in an attempt to resolve demands from the United States that new automobiles contain a greater percentage of parts produced within the North American trade bloc and meet higher wage requirements in order to be traded without import tariffs under a renegotiated North American Free Trade Agreement (NAFTA). On Aug. 23, Mexican negotiators agreed that vehicles assembled at existing plants that do not meet new rule-of-origin percentages and wage requirements will be subject to a 2.5 percent tariff. Vehicles produced at yet-to-be-built factories will be subject to higher tariffs that will be determined by the White House upon recommendations by the U.S. Department of Commerce.
Why It Matters
The agreement resolves a key point of contention between the United States and Mexico. U.S. and Mexican negotiations on automotive trade had hindered progress on an overall NAFTA deal. Now, the United States, Canada and Mexico can resume talks on pressing issues of trilateral concern, such as demands by the United States that a new pact remove the old agreement's investor-state dispute settlement mechanism and include a sunset clause mandating a review of the free trade agreement every several years. However, disputes between the United States and Mexico may again develop if Washington pressures Mexico to include a new chapter on energy in a final NAFTA deal. Mexican President-elect Andres Manuel Lopez Obrador is reluctant to include energy trade in NAFTA, since his incoming government is considering broad changes to secondary energy reform laws to which the United States could object. Negotiating energy in NAFTA would legally constrain Lopez Obrador's administration and some members of his proposed Cabinet w to avoid that.
In the long run, the agreements reached between U.S. and Mexican negotiators could dissuade some investments in Mexico. Some automakers, such as Volkswagen, would likely struggle to meet the revised NAFTA rules-of-origin requirements, could suffer heavier tariffs from the Department of Commerce investigation and may not find it as profitable to manufacture entry-level vehicles in higher-wage areas.
Background
The U.S.-Mexico agreement on vehicle tariffs is part of a wider effort by the White House to reduce the U.S. trade deficit with Mexico and deny the latter some trade advantages gained through its relatively low wages. In the NAFTA talks, the United States also successfully pressured Mexico to accept demands mandating that 75 percent of a vehicle's components should come from within the trade bloc if it is to qualify for tariff-free trade. The current level is 62.5 percent. Washington also demanded wage requirements for tariff-free trade. To qualify now, 40 percent of a passenger car's final assembly must be produced in areas where workers make $16 or more an hour. For trucks, the threshold will be 45 percent.
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