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Canadian auto industry officials welcome trade stability but worry about costs.
Canadian auto industry officials welcome trade stability but worry about costs.

USMCA No Panacea for Canadian Automakers

To succeed in a new USMCA-united marketplace, Canadian automakers need to lower operating costs inflated by the wages of highly skilled labor, sophisticated automation and punishing energy costs.

OTTAWA – A Canadian automotive industry association wants its federal government and the provincial administration of automaking hub Ontario to address the high cost of assembling vehicles in Canada now that the United States-Mexico-Canada Agreement has been negotiated.

Drafted Sept. 30 and signed Nov. 1, but still awaiting ratification, the Canadian auto sector has been assessing the likely impact of the USMCA, guessing the agreement may come into force this summer.

Mark Nantais, the Canadian Vehicle Manufacturers’ Assn. president, says while the USMCA offers welcome stability and a likely continuation of regional supply chains, it does open Canada-based automakers to competition.

And with Canada regarded as “a high-cost jurisdiction,” he has called on the Canadian and Ontario governments to think creatively about helping his members tap future market opportunities available to association members’ quality advanced manufacturing. This includes Internet of Things technology, ride-sharing systems, autonomous vehicles and more.

But to succeed in a new USMCA-united marketplace, Canadian automakers need to lower operating costs inflated by the wages of highly skilled labor, sophisticated automation and punishing energy costs. These are especially high in Ontario, where most Canadian auto and parts production takes place, and may rise further because of a federal carbon levy taking effect April 1.

As a result, Nantais says, the Canadian and Ontario governments need to help manufacturers struggling with “high costs…relative to competing jurisdictions.”

For instance, he notes Canadian automakers spend money on natural-gas heating and paint-shop temperature controls not needed in factories located in warmer regions of the southern U.S. and Mexico.

“We’re calling on the governments to work with us to reduce these costs. We have to think creatively,” Nantais says.

This is especially the case given the complex rules of origin included within the USMCA.

David Adams, president of Global Automakers of Canada, says it is unclear whether the USMCA’s highest-profile rule of origin – that 40% of value (assessed by a complex formula) must be added from workplaces with a minimum wage of $16 – will lead to manufacturers transferring production from Mexico to Canada and the U.S.

But he does anticipate the cost of North American-made vehicles sold in Canada and the U.S. may rise because of the USMCA, and there is concern that this might put North American autos at a “competitive disadvantage to vehicles built elsewhere in the world.”

Nantais contends the rules of origin are so complex, their mere assessment would add costs. As well as the labor rules, these also include a requirement that 75% of an auto’s value be sourced in USMCA countries to qualify for the deal’s benefits; special rules on the sourcing of parts, such as steering wheels and electric-vehicle components; and that 70% of steel and aluminum used in autos covered by the deal be sourced from USMCA countries.

Would this lead to quick change in sourcing chains? Nantais says no. Not only will it take time to assess whether an auto company complies (with customs officials overseeing compliance), any move to change sourcing also would have to comply with certification requirements, as well as cost and technical compatibility.

On the positive side, Adams welcomes that the USMCA will “provide our members – which have a footprint in all three countries – with preferential access to the U.S. market.” And he expresses relief that the deal will protect the Canadian automotive industry from being hit directly by American national-security tariffs, which were threatened by President Donald Trump during the negotiations.

As for whether the USMCA will change the Canadian auto sector’s product mix, Adams says the Canadian government has negotiated a deal designed to preserve the current structure of the country’s auto industry. But he stresses that makeup is dynamic, highlighting General Motors’ decision to close production in Oshawa, ON, which Adams believes was not connected to the USMCA deal.

What would make the agreement more palatable for Canadian manufacturers would be an end to the American tariffs of 25% on Canada steel exports (below, left) and 10% on aluminum exports, which have sparked retaliatory duties from the Canadian government on similar U.S. exports to Canada.

Trump Admin. argues steel tariffs needed for national-security reasons.

While Nantais says the USMCA is “a workable framework to support the highly integrated North American automotive industry,” ending the steel and aluminum tariffs as quickly as possible is important because they “are undermining the spirit of the agreement” and preventing it from achieving its full potential, he argues.

However, as Adams points out, with the U.S. government shut down because of the dispute between Trump and Congress over border security, little administrative work is being undertaken in Washington, including at the U.S. Trade Representative’s office, who would be responsible for negotiating a deal to scrap the metal tariffs.

The standoff also is impeding efforts to ratify the USMCA. Congress had been expected to approve the deal after receiving an impact assessment from the U.S. International Trade Commission, but this work, Adams notes, “is being held up by the shutdown.”

With no end to that in sight, he predicts USMCA ratification may not happen until the summer. And with the Canadian government not expected to proceed with its ratification until American ratification is more solid, the USMCA is months from taking effect.

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