As NAFTA battle lines are drawn, repercussions loom on dealership lots

October 20, 2017

NAFTA negotiations have reached an impasse in several key areas, chief among them a series of regulations surrounding the automotive sector.

While Canadian Foreign Affairs Minister Chrystia Freeland referred to a “series of unconventional proposals” and Mexican Secretary of the Economy Ildefonso Guajardo said, “we all have our limits,” their sparring partner, U.S. Trade Representative Robert Lighthizer, said simply, “the agreement has become very lopsided and needs to be rebalanced.”

The protectionist policies are aimed at forcing automakers to build factories within the United States instead of Mexico or Canada, but the impact of such a shift would raise the price of many new cars. And possibly impact your car’s LCD screen.

One of the key talking points centers on the so-called “rules of origin” that govern which products can be imported into the United States without being subjected to taxation. The traditional standard for eligibility has been that 62.5 percent of a vehicle’s contents must be from one of the NAFTA nations. The Trump administration insists, however, that all cars and trucks must consist of at least 85 percent NAFTA-supplied parts, and it has included a new demand that fully half of the vehicular content be from the United States for a vehicle assembled in Mexico or Canada to be imported duty-free.

If the U.S.-proposed NAFTA changes were to be approved as-is, there are two general scenarios likely to happen: manufacturers reaching the targeted U.S.- and NAFTA nation-made percentage targets, and manufacturers failing to reach the targets and instead taking a tax-hit on each vehicle. Both would result in increased prices at the point of sale.

If manufacturers take a tax penalty on every vehicle

Manufacturers have repeatedly stated that reaching heavily revised rules of origin standards within one year isn’t doable, owing to the tremendous complexities in the chain of supply. It’s therefore highly likely that many vehicles would be taxed for having less than 50 percent U.S.-sourced content.

Many of those vehicles are at the middle-to-bottom end of the market, according to American University’s Made In America Auto Index. As studies have shown time and again, it’s these cars at the lower end of the market that are less subject to variations in demand based on factors like price and income -- buyers tend to choose an inexpensive car because they need to, and they don’t view other segments as a comparable alternative. Simply put, a tax on vehicles on the lower end of the spectrum will get passed on directly to consumers because a price increase of a couple percentage is unlikely to result in a dramatic sales impact.

Thus, the price of a $25,000 sedan could go up by roughly the same percentage as the new tax.

If manufacturers shift operations to comply with a stricter standard

For manufacturers to attempt to meet a stricter rules of origin standard, they will have to make significant alterations to their chains of supply. Many of those chains of supply have been honed over the course of decades to create the cheapest, most efficient options possible. By definition, restructuring will drive up the costs of production, which would then be passed onto consumers.

With additional rounds of negotiation set to continue into 2018, nothing is likely to change in the short term. If anything like the proposed policies gets approved, however unlikely, it might be time to buy that new car or truck before they’re enacted.

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