The United States’ new bilateral trade agreement with Mexico, intended as a partial replacement for the 24-year-old North American Free Trade Agreement between those two countries and Canada, is expected to lead to higher costs for automakers – and thus, higher prices for consumers – if ratified. Automobiles were a key focus during negotiations, and under the new tentative deal, at least 75 percent of a vehicle’s value would have to come from within the member nations in order for that vehicle to escape tariffs. NAFTA had a requirement of 62.5 percent.
The agreement also calls for a minimum of 40 percent of vehicles to be made by employees making at least $16 per hour – a provision that seems especially aimed at encouraging American production.
“The new agreement will push production costs higher on Mexican products – parts and vehicles – which, eventually, will be paid by American consumers,” says Autotrader Executive Analyst Michelle Krebs. She says that costs are already trending upward for other reasons, such as “higher transaction prices because of the richer mix of utility vehicles, metal tariffs, [and] more technology content.
“A new NAFTA agreement will only add to the price headwind consumers are already facing.”
Automobile manufacturing is a large, complex ecosystem, with billions upon billions of dollars invested all around the globe between automakers and their suppliers. As such, making sudden, abrupt adjustments in where a part is sourced from or where final assembly takes place is difficult-to-impossible. “Just because a tentative trade pact has been reached with Mexico, we don’t expect automakers and suppliers to abruptly announce changes in their production plans,” Krebs says, meaning automakers will likely more-or-less maintain their current operations if the US-Mexico trade deal is ratified, driving up costs.
The used market has already seen an influx of spending in the wake of US President Donald Trump’s metal tariffs, as more people anticipate much higher prices for new cars. Ms. Krebs says that while used car prices typically decline during the summer, this year, they’ve been rising for ten straight weeks.
(Source: Detroit Free Press)