The White House announced a trade agreement today with Mexico that makes several changes to the North American Free Trade Agreement and could produce a wide range of outcomes for car prices in the U.S.
The tentative agreement proposes to change NAFTA to require 75% of auto content to be made in the U.S. and Mexico, compared with 62.5% currently and instructs automakers to ensure that up to 45% of that auto content be made by workers earning at least $16 per hour, according to Reuters.
It’s unclear how this would fully impact car prices and values moving forward, Eric Ibara, director of residual value consulting at Kelley Blue Book, told Auto Finance News. On one hand, prices could go up if cars made in the U.S. and Mexico fall below the 75% auto content standard and regional suppliers aren’t able to provide the same savings.
“My guess is that any vehicle that is not meeting the content requirements is they will just find new suppliers where possible because they will want to avoid tariffs as much as possible,” Ibara said. “The largest impediment will be in the case where engines are manufactured overseas or another major component that can not so easily be shifted to the U.S. or Mexico. But, given the severity of the tariffs, there will be a huge incentive to find suppliers.”
Still, the industry is reacting very favorably. The stock market is up following the news because it reduces the risks involved with a possible trade war with Mexico.
Concerns have swirled for nearly a year that tariffs with Mexico would raise car prices for consumers and reduce the industry’s ability to push metal, but this announcement — at least in the short term — is assuaging those concerns.
However, the proposed plan has a long way to go. Canada has not been involved in the latest round of negotiations and the White House said it will push to get a deal finalized with the neighbors to the North by weeks-end. Any deal will have to pass Congressional approval before it can be enacted.
“You can see that the market is very pleased with the announcement, we’re having a field day on Wall Street, which should please anyone with a retirement account,” Ibara said. “But, there still remains Canada and Europe and other countries to go and I’m very curious how that all plays out. If the market is this exuberant about Mexico, can you imagine [its] reaction to a deal with Europe?”Like This Post