Changing or eliminating free trade agreements between Canada, the U.S. and Mexico could have a lasting impact on the automotive industry.
On May 18, U . S . P re s i d e n t Donald Trump announced a 90-day countdown period (to August 16) that would lead to renegotiating the North American Free Trade Agreement (NAFTA).
For the automotive industry, which is one of the most integrated in North America, any change to the NAFTA agreement could have serious implications, and this extends from the OEMs to suppliers, parts manufacturers, wholesalers, distributors, retailers, service providers, collision centres and third party vendors, including equipment suppliers, service providers, financing, leasing and marketing companies.
The Automotive Industries Association of Canada, which represents the interests of the automotive aftermarket, has created a community of practice around NAFTA, including conference calls and position papers. AIA has also released a document called What’s Next for NAFTA? which includes a high level overview of factors related to the trade agreement and what any possible changes could result in. (aiacanada.com/wp-content/ uploads/2017/01/NAFTA_final.pdf)
Integration of the North American auto industry dates back to 1965, with the signing of the Auto Pact, which eliminated tariffs between Canada and the U.S. allowing the former access to the largest auto market in the world, while lowering costs in the manufacturing, distribution, sale and service of vehicles in Canada.
In 1988, the Canada-U.S. Free Trade agreement was drawn up, which further integrated economic ties between the two countries. CUFTA essentially laid the groundwork for what became the North
American Free Trade Agreement (NAFTA) in 1994. This integrated Mexico into the free trade area, opening up the Mexican market to imports and exports from the U.S. and Canada.
If the U.S. were to renegotiate or make amendments to NAFTA, that could negatively impact the integration of the North American automotive industry, causing companies to shutter factories and raise tariffs, driving up the cost to manufacture both vehicles and parts, which in turn would impact the entire supply chain and demand.
Who has the authority?
An even bigger question is: Who exactly has the authority to either amend or dismantle the NAFTA agreement? According to an article from Jacob Shapiro in Geopolitical Futures entitled The American President’s Power over NAFTA, “despite the complexity of the agreement, the mechanics of withdrawing from NAFTA are simple.”
It cites Article 2205 of the NAFTA agreement, which states, “A Party may withdraw from this Agreement six months after it provides written notice of withdrawal to the other Parties. If a Party withdraws, the Agreement shall remain in force for the remaining Parties.”
In reality, the situation is likely to be far less clear cut. As we head to August 16, it might be important to remember a history lesson. Back in 1992, Bill Clinton made a commitment to renegotiate NAFTA while Canada’s then Liberal party was against it. In 1994, when both Clinton and Jean Chretien were in power, Canada and the U.S. formally accepted NAFTA and it has stood ever since.