CUSMA Market Access: Domestic vs. International Steel and Aluminium Producers
Team Lead: Samantha Jennings
Primary Contributors: Mayuran Sivakumaran and Jasmine Bao
As the world’s most industrialized nations met in Buenos Aires for the G20 Summit, Canadian, American and Mexican leaders have taken the meeting as an opportunity to finally ratify the new NAFTA, now labelled the CUSMA on November 30, 2018.[i] Though all leaders are glad to have come an agreement, there is still much uncertainty surrounding its effects on the aluminum and steel industries within the three countries.
With the new deal in place, the agreement includes important terms such as:
- Total North American content of a vehicle must equal 75% to qualify for zero tariffs (up from 62.5% under NAFTA)
- 70% of steel, aluminum, and glass used in production of the automobile must originate in North America.
- 40-45% of auto manufactures must be produced by workers who earn at least $16 USD an hour by 2023[iii]
The CUSMA has introduced “country of origin clauses”, which de-incentivise the outsourcing of automobile parts to international aluminum and steel producers, while the new minimum wage requirements discourage investments in foreign manufacturing infrastructure in cheaper labour markets such as Mexico, or other Asian countries (China, Vietnam, India). The goal of these clauses is to incentivise investment in American production, but in doing so they also increase American automotive production costs, and make North American cars less competitive in the international market. Therefore, international automotive producers ought to diversify their investments in non-North-American markets, where they have a competitive advantage over American producers. Market analysts suggest that China (the largest car market in the world) will receive much more attention from German and Japanese automotive producers due to its increasing demand for luxury and electric vehicles.[iv]
Since 70% of steel and aluminum production must be sourced in Canada, Mexico, or the US, USMCA certainly offers more competitive advantages for North-American steel and aluminum producers, but risks exist within the agreement which may threaten its execution.
The first and foremost risk that must be addressed are the tariffs that are still in place despite the ratification of the CUSMA. On May 31, 2018, the United States announced tariffs of 25% on imports of Canadian steel and 10% on imports of Canadian aluminum, taking effect on June 1, 2018.[v] The U.S. has imposed these same tariffs on Mexican products. In addition to this, Canada responded by levying similar trade-restrictive countermeasures on up to $16.6 billion in imports of steel, aluminum and other products from the United States.[vi] Although the deal does designate quotas for automotive production within the three countries, this production will largely be confined within the realm of each country, with very little trade happening if the tariffs remain in place.
To mitigate this, all three countries must come to an agreement to eliminate or to considerably drop the tariff rates. It is recommended that politicians continue to emphasize the sizable losses that will come about and look at levying tariffs on U.S. sectors that are key to the economy, such as agriculture. President Trump endorsement of the “America First” policy on labour is a serious impediment to the utility of this agreement and is rather counterintuitive to the objectives and scope of the deal.
When looking at the aggregate domestic market, the U.S. is the biggest importer of Canadian steel and aluminum. In Canada, the steel industry creates 22,000 jobs directly and 100,000 jobs indirectly, while the aluminum industry creates 8,300 jobs directly and 20,000 jobs indirectly.[vii] The implications that the tariffs have on the labour market in Canada are drastic as several jobs have been and will continue to be affected.
The United Steelworkers of Canada Union has called the deal a “sellout”.[viii] General Motors has shut down seven plants across North America, laying off 14,000 workers or 15% of their workforce.[ix] The risk posed by the tariffs are already materializing as workers become disillusioned, and must relocate. Looking at the issue from a macro perspective, the domestic market appears to be losing out with a significant reduction in employment having an effect on the overall economy. To reiterate, an emphasis on the consequences of labour and economic downfall must be emphasized to the Trump administration, but moreover, it must be emphasized to all parties that the competitiveness of the domestic steel and aluminum industry will start to cede to international markets if the tariffs are not addressed.
[i] Janyce McGregor, “’Battle’ over as Trudeau, Trump, Pena Nieto sign ‘new NAFTA’,” CBC News, November 30, 2018.
[iii] Livingston Simply Trade, From NAFTA to USMCA: Free Trade in North America Today & Tomorrow, 2018. https://www.livingstonintl.com/nafta/
[iv] Howard, P. W. (2018, August 28). Car prices projected to increase under Trump trade agreement with Mexico. Retrieved December 2, 2018, from https://www.chicagotribune.com/classified/automotive/sc-auto-tips-0830-car-prices-increase-20180828-story.html
[v] Government of Canada, Steel and Aluminum, October 11, 2018. http://international.gc.ca/trade-commerce/controls-controles/steel_alum-acier_alum.aspx?lang=eng&utm_campaign=steel-acier&utm_source=commerce&utm_medium=slideshow-en
[vi] Ibid.
[vii] Naomi Powell, “Steel tariffs remain in force as Trump credits them with clinching USMCA deal,” Financial Post, October 2, 2018.
[viii] Ibid.
[ix] Peter Campbell and James Politi, “General Motors shuts down 7 plants, drawing rebuke from Trump,” Financial Times, November 26, 2018.
