A chorus of manufacturing leaders and trade organizations from Michigan are urging Congress to pass a new trade agreement with Canada and Mexico.
While Canada and Mexico represent less than 4 percent of the global economy, they are influential purchasers of Michigan goods. The two countries purchase one-fifth of the total value of U.S. manufacturing output — more than the next 11 countries combined.
“We can literally look across the Detroit River and see Canada,” said Jade Sims, an international trade specialist in the International Business Center at the Michigan State University Broad College of Business.
“It’s such a part of our daily lives living in Michigan that some of the businesses that I work with barely recognize that they’re involved in international trade (with Canada),” Sims told MiBiz.
The automotive industry in Michigan also creates a strong connection between businesses in the state and Mexico, she said.
Michigan’s top exports to Canada and Mexico include auto parts and bodies; fabricated metal products; iron and steel; electrical equipment and components; and engine, turbine and power transmission equipment.
Without an agreement that secures tariff-free trade across North America, Michigan’s manufactured exports to Canada and Mexico could face a minimum of $1.1 billion to $5.2 billion in additional taxes on about $34 billion worth of materials, according to data from the National Association of Manufacturers (NAM).
“We’re very dependent upon them and they’re very dependent upon us,” Sims said. “Changes to those trading rules are going to have pretty intense effects on our economy, our jobs and our communities.”
The United States-Mexico-Canada Agreement (USMCA), a new deal to replace the North American Free Trade Agreement (NAFTA), has been signed by U.S. President Donald Trump, Mexican President Enrique Peña Nieto and Canadian Prime Minister Justin Trudeau since the G20 Summit in November. However, the deal is not yet ratified domestically or in Canada.
NAFTA, which added Mexico to an exiting free trade agreement between the U.S. and Canada, went into effect 25 years ago.
“Most people agree that NAFTA definitely needed to be updated,” Sims said. “We are in a very different space than we were 25 years ago. Supply chains have become so much more global. It’s not like something crosses the border once. It’s crossing the border now up to seven times between the U.S. and Canada, for example, before it even goes into a finished automobile.”
Modernizing NAFTA
The new agreement — which remains much the same as NAFTA — will expand U.S. exports, improve intellectual property protection and enforcement, and create new provisions on digital trade, according to NAM.
“The issue is as much about modernizing the agreement as it is about the risk that the agreement fails,” said Mike Johnston, vice president of government affairs at the Michigan Manufacturers Association.
“The Trump administration has said if there is no deal, they’re putting big tariffs in place,” Johnston said. “That is just not something that is good for business.”
However, opponents argue any new North American trade agreement needs to more than tinker with the outdated NAFTA. They also note the secondary economic costs of an underdeveloped agreement may be too high. For example, automobile rules of origin (ROO) requirements under USMCA would be increased to 75 percent from 62.5 percent, and there is concern that the increased domestic sourcing, a measure aimed at promoting U.S. employment, will come with disruptions to existing supply chains.
Opponents also say that Mexico should demonstrate its commitment to expanded labor reform — which might sway domestic manufacturers from soliciting cheap labor there — before Congress considers ratifying the USMCA.
Mexican workers at auto parts plants made less than $4 an hour on average in 2017, according to data from the Ann Arbor-based Center for Automotive Research (CAR). By comparison, workers at the soon-to-be-closed General Motors plant in Hamtramck and at the now-shuttered assembly facility in Lordstown, Ohio earned a reported $30 an hour.
The Mexican auto sector has attracted tens of millions of dollars of foreign direct investment since NAFTA went into effect, including from GM, which chose to manufacture its new Chevrolet Blazer crossover in Ramos Arizpe, Mexico, where the starting wage is less than $2 an hour.
The new USMCA agreement mandates that 40 percent of every duty-free vehicle must be made by workers earning an average of $16 an hour. However, opponents of USMCA say the mandate, which includes highly paid engineers and designers in the average, will be too easily reached even in the absence of significant increases to hourly wages or labor conditions in Mexico.
However, it’s unclear where Michigan’s auto manufacturers would recruit hourly labor even if more plant and assembly jobs became available in the state, which had an unemployment rate of 4.2 percent as of June, the most recent data available.
“The concept is to encourage the purchase of more components locally from tier suppliers as opposed to going somewhere else for those parts,” Sims said. “At the end of that chain, Ford or GM being able to source locally at competitive prices is going to be part of the challenge.”
Political football
While the White House is pushing for quick ratification, House Democrats have said they will not proceed until their economic and labor-related concerns are met.
“It ends up being a political battle for them over the next presidential election, sadly,” the MMA’s Johnston said. “This is an important economic issue that needs to get resolved and it’s becoming a political issue over jobs and wages when it should be a very clear and easy decision for Congress to lead the way to solving one of the great economic challenges facing the United States.”
After a Senate hearing last week, Michael Wessel, staff liaison for the United Steelworkers Union to the Labor Advisory Committee, told reporters that changes in the text and amendments are not uncommon in far-reaching trade agreements, even after they have been signed. The last four trade deals before the now-defunct Trans-Pacific Partnership were amended after they were ratified, he added.
“People are at the table, there’s goodwill and we’re hopeful,” Wessel said. “There’s no desire to delay this, but there’s a lot of work to be done.”
A sunset clause included in the new deal will place more control over shaping North American trade in the hands of future domestic governments. However, concerns persist that the agreement’s expiration date will create greater uncertainty in automotive manufacturing and other sectors that require significant investment in cross-border supply chains.
“I hope policymakers recognize their role of making Michigan competitive and don’t get caught up in extraneous political strategies,” Johnston said. “This is about an economic decision that is good for America and they ought to move forward and do what’s right for America.”
