Trump is in Michigan to tout the new NAFTA. Here’s what it means to Michigan.

auto plant

The new agreement mandates that 40 percent to 45 percent of car parts be made by workers who earn at least $16 an hour by 2023. (Shutterstock image)

President Donald Trump plans to visit an auto parts supplier in Warren on Thursday to tout the new United States-Mexico-Canada Agreement (USMCA) during his first trip to Michigan in 2020.

Signed Wednesday, the deal replaces the North American Free Trade Agreement that Trump has long reviled. The Republican president has argued that the pact was responsible for manufacturing job losses in states like Michigan as some factories fled to Mexico. 

The new trade deal was passed by Congress with bipartisan support and comes with the endorsement of leading Democrats, who say they fought to include more protections for workers and the environment. It still must be approved by Canada before taking effect, but the nation’s leaders are expected to sign it soon. 

While proponents say the deal will boost car production in heavy auto manufacturing states, experts told Bridge Magazine it could also have the opposite effect over the long term, as car companies may choose to leave North America rather than comply with increased regulations. 

Michigan is home to two of the biggest auto manufacturers in the world — General Motors and Ford — and has more auto manufacturing jobs than any other state in the country by far. 

trump

President Donald Trump plans to visit an auto parts supplier in Warren, his first trip to Michigan this year. (Shutterstock image)

Here’s what’s in the landmark new trade deal and what it may mean for Michigan: 

What’s in the USMCA 

The massive agreement is in many ways just a modernization of the old NAFTA agreement, but it also includes several changes that may have an impact on Michigan’s economy and workforce. 

The deal: 

  • Requires cars have at least 75 percent of their parts manufactured in the United States, Canada or Mexico to be exempted from a 2.5 percent tariff — that’s up from 62.5 percent under NAFTA. 
  • Mandates 40 percent to 45 percent of car parts be made by workers who earn at least $16 an hour by 2023. That’s about three times as much as the average wage in Mexico’s automotive industry. In the U.S., the average industry wage is around $23 per hour. 
  • Requires 70 percent of the steel and aluminum in a car must originate in North America.
  • Creates an independent panel that can investigate possible labor violations and stop shipments of factories that don’t meet labor standards. The provision was added to win support of unions such as the AFL-CIO.
  • Allows farmers to sell more milk, cream, butter and cheese in Canada, which was previously tightly restricted. A $1.8 billion industry, dairy is the most valuable agricultural product in Michigan
  • The deal expires after 16 years and is subject to review every six years. 

In the short term, Michigan may see more auto manufacturing jobs

The requirement that 75 percent of parts are made in North America is intended to incentivize automakers to stop buying car parts from other areas of the world and labeling it an American, Mexican or Canadian product. 

The high-wage requirement also may force automakers to buy more parts from factories in Michigan and other states that pay an average wage above $16 an hour, especially if Mexican producers struggle to raise wages initially, said Alan Deardorff, a professor of international economics and public policy at Ford School of Public Policy at the University of Michigan.

“One of the reasons for doing that is to try to move some employment out of Mexico and the rest of the world to the United States,” Deardorff said. “That’s certainly the direction of the effects that you would expect, but how big it will be is impossible to know.”

Long term, it may decrease auto manufacturing jobs in Michigan

Eventually, the USMCA policies could lead to higher expenses for car companies. They’ll have to choose between parts made by higher-wage workers or paying the 2.5 percent tariff — either way, the cost of building cars is likely to rise. 

“It’s going to hurt their profits, it’s probably going to raise their prices, and probably going to reduce the amount they sell,” Deardorff said. 

“If we end up selling fewer cars because of the higher price, maybe there wouldn’t be more workers employed because we’ll be making fewer cars.”

When compared with countries like China that don’t face similar restrictions, “it’s going to make Michigan and the North American auto industry in general less competitive,” said Marina Whitman, an economist and former executive at General Motors and professor emerita at the University of Michigan. 

The deal could prompt new investment by auto companies

Uncertainty over the agreement created a lot of anxiety within the industry, said Hoyt Bleakley, a professor of economics at the University of Michigan. 

“Investors don’t just get anxious, they stop investing too,” Bleakley said. 

“The most important benefit of having the treaty is resolving the uncertainty about what would happen if NAFTA had been dumped and not replaced.”

But auto industry investors usually consider investments more than six years in advance, when the USMCA will be up for review. If Canada, the U.S. or Mexico dont agree to continue the deal, it would expire 16 years later.

“This simply means a considerable degree of uncertainty will remain,” Whitman said. “That’s going to be hard to deal with” for companies seeking investment.

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Comments

Ypsilanti
Thu, 01/30/2020 - 9:34am

There is way more at play in the auto industry than one trade agreement. The industry is at the beginning of a major upheaval and downsizing, because of a number of factors:

* Bloomberg news predicts price parity between EV's and ICE (internal combustion engine) vehicles somewhere around 2025 +/-. (1) This will result in increasing purchase rates, because of lower operational costs of EV's.
* EV's have more than 90% fewer moving parts than an ICE vehicle - making them simpler to manufacture, and cheaper to maintain. (2)
* Major suppliers in EV components aren't the traditional supply chain suppliers here in the US. LG, Sony, Samsung, etc., are major suppliers. (3)
* Ford Motor conducted an internal study, where if they were to switch fully to EV production, they could do it with *half* the manufacturing footprint they have now. (3)

That's not to say there won't still be such jobs and suppliers in the future... but the mix will be radically different.

Economists, and manufacturers, tell us that most manufacturing jobs that we have lost in the past three decades are due to changes in manufacturing - such as increased productivity (4) - rather than the "giant sucking sound" heard by Ross Perot. This is the same thing that has happened in the coal industry, despite what some would have you believe. (5)

We continue to live in a time of change.

Sources:

1. https://about.bnef.com/blog/electric-cars-reach-price-parity-2025/
2. https://www.cnbc.com/2016/06/14/electric-vehicles-will-soon-be-cheaper-t...
3. Head of UAW research to conference attendees at UAW Independent Parts Suppliers conference in Las Vegas, January 16, 2019.
4. https://money.cnn.com/2016/03/29/news/economy/us-manufacturing-jobs/inde...
5. https://siepr.stanford.edu/research/publications/what-killing-us-coal-in...

Cindy
Sun, 02/02/2020 - 7:52am

Thank you for a common sense reply.

Rork
Tue, 02/04/2020 - 6:51am

That’s only comparing the cost of the new car, and ignores the cost of owning it (fuel, maintenance).

John
Thu, 01/30/2020 - 10:21am

Great, the governor can take credit for adding jobs in the next stat of state speech.

Yay
Fri, 01/31/2020 - 3:31pm

From your keyboard to God's ears! She's going to annihilate our impeached presidentTrump when she rebuts everything he claims in his State of the Union blather. Can't wait! I might just skip his rant and tune in to watch her.

Scott Roelofs
Thu, 01/30/2020 - 6:00pm

Bottom line: the US was a big loser under NAFTA. Trump was right to replace it with USMCA which is an improvement for US interests. A previous commenter described the monumental changes underway with regard to electric vehicles. The USMCA may need tweaking as that rolls out in future years. But under USMCA, US automakers have a financial incentive to produce in the US rather than Asia. That includes Japanese automakers who have a significant mfg footprint in the US.

Keith
Sun, 02/02/2020 - 1:39pm

Actually it gives auto makers the incentive to make cars in North America . Not necessarily in the U.S. . It just protects from some Asian manufacturing of vehicles imported to the U.S..

Martyn
Fri, 01/31/2020 - 2:52pm

When 3rd graders 'fail,' they should be helped to continue to learn in their most preferred ways, if they are to "pass" , aka, succeed.

Keith
Sun, 02/02/2020 - 1:34pm

Sure it is a short term thing. All Trump cares about is the short term so he can get re-elected before everything goes to heck.