USMCA Watch: Trump Gets His Name But High Ceilings, Long Phase-ins Limit Impact — Panjiva
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USMCA Watch: Trump Gets His Name But High Ceilings, Long Phase-ins Limit Impact

Canada 338 Cons. Discr. - Apparel 214 Cons. Discr. - Autos 661 Materials - Metals/Mining 482 Mexico 505 Trade Deals 702 U.S. 3297 USMCA 373

The U.S. and Canada have reached an agreement for the latter to join the bilateral deal previously reached with Mexico, with added provisions that have yet to be detailed. That will result in a full replacement for NAFTA, to be known as USMCA, the text for which has yet to be published. The revised text of the deal will now be reviewed by the U.S. Congress – as well as the parallel bodies in Mexico and Canada – in time to allow a formal signing of the deal by November.

As outlined in Panjiva research of September 3 the critical sticking points between the U.S. and Canada were dairy market access, dispute settlement (both between countries and for investors vs. governments) and standards for the automotive sector. All three have been addressed.

There are updates to the rules of origin (ROOs) – namely the proportion of a product that has to come from within the region for the product to be eligible for duty free treatment – for several sectors. These include apparel (relating to threads used) and metals but it is the autos sector that is most important proportionally.

Panjiva data shows the value of U.S. apparel imports from Mexico and Canada reached $5.57 billion in the 12 months to July 31 compared to $34.3 billion for base metals and $138.0 billion for vehicles and autoparts.

AUTO 3.5x AS IMPORTANT AS METALS AND APPAREL COMBINED TO U.S. IMPORTS

Chart segments U.S. imports from Canada and Mexico by product (defined at HS-2) for vehicles, autoparts, apparel and base metals.   Source: Panjiva

Aside from rules of origin for the automotive sector there are also specific caps relating to the number of vehicles that can be shipped to the U.S. that will be exempt from duties (including future section 232 tariffs).

These amount to 2.6 million vehicles for Canada on top of 2.6 million for Mexico excluding light trucks. That will help settle the separate section 232 review of the automotive industry. One challenge for exporters from Japan and Europe, who are involved in negotiations for new trade deals with the U.S., and from South Korea who will be squeezed within the cap.

Exports of completed vehicles from Canada and Mexico accounted for 1.71 million and 1.82 million (2.57 million vehicles including light trucks) in the 12 months to July 31. Their respective caps are therefore 53.8% and 43.2% higher. Any further growth in vehicle exports would be subject to duties at 2.5% currently and potentially an additional 25% at a later stage. Japan, the EU and South Korea accounted for 5.2 million vehicles supplied, or 54.5% of the total.

LOTS OF HEADROOM FOR MEXICAN AUTOS DESPITE RECENT EXPORT GROWTH

Chart segments U.S. imports of passenger vehicles (selected from HS 8703) by country of origin in the past 12 months. Bubble size indicates total imports.   Source: Panjiva

The rules of origin for autos are highly prescriptive. As well as applying an overall level of 75% of value for cars in total there are also specific rules for parts (split between “core”, “principal” and “complementary”) of 50% and labor value rules requiring 40% of value to be calculated using wages of $16 per hour.

There is also an absolute cap for exports to the U.S. of $32.4 billion for Canada and $108 billion for Mexico. That compared to $11.9 billion and $40.5 billion in the past 12 months respectively, so the caps are 2.7x the current level of exports.

The good news is that automakers have plenty of time to adapt. For example for cars the new levels are phased in annually through January 2023 while for heavy trucks that runs through 2027.

PRINCIPAL-ED GROWTH

Chart segments U.S. imports of core, principal and complementary autoparts by country of origin.   Source: Panjiva

Correction (10/01): Mexican exports of vehicles covered by the 2.6m cap covers only passenger cars and not light trucks.

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