Tariffs and trade agreements are having a significant impact on the auto industry. While the USMCA is reducing administrative costs on vehicle and parts manufacturers, the rules of origin that undergird NAFTA’s automotive industry are also outdated. China’s industry has become largely independent of the US market, and South Korea has been working hard to minimize the impact of trade deals on its economy.
China’s auto industry is largely independent of the US market
While the United States and China may have a frosty relationship, their economies are more intertwined than ever. For a start, a lot of goods are made in China. Those same goods are shipped to the US for a price. Likewise, a lot of imports from the United States go the other way. This has resulted in a host of tariffs that raise the price of a lot of stuff.
Not all of these are bad, in fact, a lot of them are good for the economy as a whole. But, what are the pitfalls? The most obvious one is that the Trump administration has been known to put the screws to its own neophyte minions. Aside from being unemployed, the average American consumer is paying a higher price for a slew of imported goods. Moreover, the Trump administration has been known to target specific sectors – such as the aviation industry – for more than the usual dints and dents.
USMCA reduces administrative burden on vehicle and parts producers
The United States-Mexico-Canada Agreement (USMCA) is a pact that replaces the North American Free Trade Agreement (NAFTA) with an innovative set of rules. It lays out a framework for future regional integration that strengthens the competitiveness of the United States and Canada, while supporting U.S. jobs in the automotive sector.
USMCA includes provisions to promote reshoring of vehicle and parts production. These changes are designed to reduce the administrative burden on automakers and incentivize new investment in the U.S. and Canadian automotive industries.
USMCA sets thresholds for a number of vehicle and part content requirements, including a 75 percent Regional Value Content requirement. This is a significantly higher percentage than NAFTA’s 62.5%.
Vehicle and part manufacturers must develop a plan to comply with the new USMCA requirements. If they do not, they may face increased costs and reduced vehicle demand. They will also need to evaluate global supply chains.
NAFTA’s automotive rules of origin are outdated
The United States and Mexico have been waging a fight over NAFTA’s automotive rules of origin. Although the two countries have agreed to pass new labor laws to increase the safety of their workers, the dispute has caused some uncertainty.
The new auto industry rules require that passenger vehicles and light trucks have more regional content than they did under NAFTA. In addition, a number of other requirements will be implemented, including the use of a special wage. Similarly, a number of new rules will be required in the supply chain.
One of the most important changes is a rule that requires a greater percentage of automotive parts to be made in the region. Under NAFTA, the de minimis percentage was seven percent, whereas under USMCA it is upped to 10 percent.
One of the most important new rules is a rule that requires a worker to earn at least $16 an hour by 2023. Workers in Mexico will receive a minimum wage boost. These new laws are aimed at increasing protections for the workers and making it easier for them to unionize.
South Korea’s efforts to mitigate tariffs and trade agreements impact on auto industry
There have been recent efforts by South Korea and the United States to mitigate the impact of tariffs and trade agreements on the auto industry. These agreements are designed to facilitate more investment and promote trade. However, the process took a long time and required considerable input from both sides.
As part of the process, the U.S. and South Korea negotiated a bilateral free trade agreement (FTA). This agreement will allow more U.S.-made cars to be sold in South Korea.
Autos are Korea’s second largest export. However, tariffs and non-tariff barriers have made it difficult for American automakers to enter the Korean market. In order to sell their automobiles in South Korea, companies must meet safety standards, including meeting American federal safety standards.
In addition to the bilateral FTA, Korea and the United States agreed to eliminate tariffs on autos by January 2016. By agreeing to remove the tariffs, Korea is helping the United States to sell more cars in its own country. The agreement also includes a special motor vehicle safeguard for the next 10 years.