Negotiations with Canada to redraw the North American Free Trade Agreement (NAFTA) concluded on Friday, August 31 with no agreement in place due to lingering divisions and President Trump’s unwillingness to offer any concessions. However, earlier this week Mexico and the US came to an agreement regarding two provisions that will impact the automobile industry.
First, the rules of origin methodology increased from 62.5 percent to 75 percent. This means that 75 percent of the product must be built in the NAFTA region to avoid tariffs. The goal in setting these stringent standards is to encourage car manufacturing to return the United States and the NAFTA region. However, there is a growing concern that too high of a standard may have the opposite effect.
Secondly, a new provision was added which requires that 40-45 percent of labor must take place at a factory where the salary average is 16 US dollars per hour. Similar to the rules of origin provision, this was designed to bring manufacturing jobs back to the US, where a $16 per hour salary is more commonplace. This new provision is a major loss to Mexico.
However, without Mexico’s negotiations and a restructured NAFTA are contingent on Canada’s involvement as the third member of NAFTA. Without Canada’s participation, this may become a dissolution of NAFTA and a creation of a bilateral trade agreement. This is a new territory that could impact a large number of individuals and businesses.
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