Trump's New Nafta is a Proven Failure Already
USMCA, Trump's NAFTA replacement entered into force on July 1, 2020.
Trump hailed USMCA and Nancy Pelosi signed off on the deal because both assumed production would shift to the US.
However, rather than move plants to the US, Japan Auto Companies Will Triple Mexican Pay.
The US-Mexico-Canada Agreement requires 40% or more of parts for each passenger vehicle be manufactured by workers who are paid at least $16 per hour as a condition to make them tariff free in the region. Trump hailed that feature as a way to boost production in the U.S., which has a higher hourly rate than Mexico.
Trump's theory was that U.S. production would inevitably increase to meet the 40% requirement, but Japanese automakers, which had already positioned their production bases according to the old NAFTA regime, are not simply willing to pull up stakes and redeploy.
The cost of moving operations is too great so companies will raise pay in Mexico rather than move production to the US.
- Honda Motor-affiliated parts maker Keihin will raise the hourly wage of employees at a factory in Mexico to $16 triple the average rate of a parts factory in Mexico, but still cheaper than making a move.
- Auto component maker Piolax, will also raise the hourly wage at its Mexican plant to $16 within the year. The company is also installing robots to mitigate rising labor costs, President Yukihiko Shimazu said.
- Toyota Motor, which built a new plant in Mexico in 2015, is not finding it easy to change plans either. If Toyota does not operate the factory, it cannot recover its investment.
U.S. research agency Center for Automotive Research estimates that 13% to 24% of all cars sold in the U.S. will be subject to tariffs. If automakers pass these costs on, prices will rise by $470 to $2,200.
The center also said U.S. car sales will drop by up to 1.3 million units annually due to the Trump administration's trade policy -- including sanctions on China. It estimates that 70,000 to 360,000 jobs will be lost, leading to a $6 billion to $30.4 billion reduction in gross domestic product.
I wrote about USMCA, the new Nafta replacement several times, most recently on December 10, 2019. In Apparent Victory for Trump, Pelosi Approves USMCA: Look Closer
Nearly anything the AFL-CIO supports is, by definition, bad for US consumers.
Thus, if this deal really is a "dramatic improvement", I propose it is dramatically worse.
Trump is bragging about USMCA. And most Trump supporters will see it that way.
But at best, the deal represents no significant changes.
Importantly, the more the AFL-CIO and Pelosi are right, the worse Trump's deal is in practice.
Art of the Bad Deal
Previously I thought USMCA was much ado about nothing. I was wrong. Trump messed things up.
Instead of moving auto jobs to the US, Trump's deal increased the price of cars and reduced US production.
This is what happens when you mess with global production chains and you have no idea what you are doing.
Trade deals are generally win-win. But Trump demanded provisions specifically designed (or so he thought) to give the US a better deal.
Mexico went along with Trump's demands because it correctly thought otherwise.
Right out of the gate it is clear Trump made matters better for Mexico and worse for the US, precisely the opposite of what USMCA was supposed to accomplish.