2023 | 10.6 million vehicles |
1994-2019 average | 10.7 million vehicles |
1975-1993 average | 10.3 million vehicles |
* Bureau of Transportation Statistics for 1993-2021; OICA for 2022 and 2023. From 1993-2019, production ranged from a low of 5.7 million vehicles during the financial crisis in 2010 to a peak of 13.0 million in 1999.
Trump administration negotiators in 2018 said their “primary objective” in renegotiating the North American Free Trade Agreement was “to improve the U.S. trade balance and reduce the trade deficit with the NAFTA countries.” This plainly didn’t happen — deficits instead rose by a combined $91 billion by 2023 –—but not because a different agreement text or legislative drafting would have gotten a different outcome. Rather, the Trump group promised something a new agreement couldn’t, and therefore didn’t, deliver. (See below for a bit more.) As the resulting “USMCA” approaches its fourth birthday this June, the more interesting question is whether the four big real-world policy revisions separating it from the NAFTA — automotive trade, labor policy, environmental protection, internet policy, and digital data flows – are working. Here’s a somewhat troubling look at the auto side:
As a point of reference, U.S. auto production averaged 10.7 million vehicles annually over NAFTA’s 26-year life, with output varying from a 13.0 million peak in 1999 to a financial crisis low of 5.7 million in 2009. The 2016 figure was 12.2 million vehicles, of which two million went abroad for export and 10 million to American dealerships. Meanwhile, about 8 million vehicles arrived from abroad that year as imports, including 2.2 million from Mexico and 2.0 million from Canada under NAFTA’s tariff waivers. (The normal auto tariff rates are 2.5% on cars and 25% on light trucks.) According to the U.S. International Trade Commission’s “Dataweb,” about 1% of these vehicles arrived outside NAFTA — 39,000 passenger cars and 100 light trucks from Mexico, 6,000 cars from Canada — and so were subject to the regular tariffs.
USMCA’s U.S. negotiators and Congressional legislative text drafters hoped to (a) encourage more car and truck assembly in the United States, and (b) increase the “North American” parts, metal, and labor content of vehicles produced in the U.S., Mexico, and Canada for American, Mexican, and Canadian car-buyers. To this end, USMCA developed “rules of origin” — that is, legal definitions of what it means for a car or truck to be “made in” the U.S., Canada, or Mexico and therefore eligible for tariff waivers — much more restrictive than NAFTA’s. Briefly summarizing some complex formulae, NAFTA required a “regional value” of 62.5%. This meant buyers had to certify that 62.5% of a car’s value was “North American”. That is, a sedan valued at $30,000 at the border needed to show that $18,750 of its parts, labor, metal, paint, and so forth had to come from the U.S., Canada, or Mexico to qualify. USMCA’s 46-page set of rules raised this “regional value” to 75% — $22,500 of the same $30,000 car — and added new requirements covering (i) use of parts, from brake linings and transmission shafts to ball bearings, gaskets, and radios; (ii) use of metals, with 70% of the steel and aluminum in a car or truck (by value) needing to come from North American mills or smelters; and (iii) labor input, with 45% of the labor value required to be “high-wage.” The rules take effect in over five years, beginning with USMCA’s “entry into force” in June 2020 and fully in effect by 2025.
What has happened since?
Output: Not much so far, at least in the U.S. Auto production fell sharply during the 2020 COVID pandemic to 8.8 million vehicles, and as of 2023 had rebounded to 10.6 million, slightly below the long-term NAFTA average. So to date, USMCA’s auto innovations have left U.S. production about the same, though they’re still new and might have larger effects later on.
Trade: Trade flows in total likewise haven’t changed drastically. Last year’s 8 million in new car and truck imports were about the same as those of 2016, with a few more from Mexico and a few less from Canada. But the detailed data published in the Dataweb suggest an unexpected shift: at least in car trade with Mexico, USMCA seems to be getting less use than NAFTA. These figures report that in 2023, about 468,000 Mexican-made cars — 20% of the year’s 2.1 million total, 20 times the 2016 figure — arrived with the 2.5% MFN tariff rather than duty-free under USMCA. Light truck imports have also shifted a bit, though much less dramatically, with 1700 arriving outside USMCA. Canadian cars and trucks, by contrast, were almost all covered by USMCA. The 468,000 outside-USMCA vehicles are not subject to any “rule of origin” at all, so if the Dataweb figures are correct rather than some kind of data entry problem, and don’t simply reflect a temporary adjustment as manufacturers get used to new rules, the tariffed cars can contain lots more foreign parts, metal, and so forth than their NAFTA-era predecessors.
A cautionary note: The USMCA is still new, the shift is mainly in car imports from Mexico rather than in trucks or U.S.-Canada trade, and auto production patterns take years to change. More generally, the slightly lower post-USMCA auto production in the U.S. isn’t necessarily related to the agreement; it could reflect unusual post-pandemic buying patterns, EV transition, etc. But these points duly noted, the revised auto rules so far (a) don’t seem to have brought more auto production to the U.S., and (b) if the tariffed, outside-USMCA imports continue to grow, could be encouraging more rather than less “international” content in “North American” cars. They haven’t by any means failed in the conclusive way Trump negotiators’ hope for lower trade deficits failed; but so far, they seem less than a resounding success, and maybe not an improvement.
USMCA text, see pp. 224-270 of Chapter 4 for rules governing cars, trucks, and parts.
Agreements and rules:
A U.S. Trade Representative Office Federal Register Notice from last March requests thoughts on supply-chain “resilience,” with Question 8 asking specifically about rules of origin:
“There is concern that preferential rules of origin in free trade agreements can operate as a “backdoor” benefiting goods and/or firms from countries that are not party to the agreements and are not bound by labor and environmental commitments. What actions could be taken to mitigate these risks and maximize production in the parties? What policies could support strong rules of origin and adherence to rules of origin?”
The FRN.
PPI’s Gresser, testifying at the hearing a week ago Thursday, carefully suggests that USTR’s phrasing is a bit off, as adjectives like “strong” or “weak” aren’t really the point. The low-drama response, using USMCA’s auto rules as a case in point.
“A well-designed rule strikes a balance, enabling firms to meet it easily and cheaply while not being so permissive as to reduce the benefit to the countries participating in the agreement. Complex and very demanding rules, however, may be so costly or create such paperwork burdens that businesses choose not to use the agreement. In this case they may continue importing under MFN tariffs (using any outside inputs they find convenient) or find non-FTA sources instead.”
Gresser testimony.
Global perspective:
Where do cars come from? The Organization of International Automobile Manufacturers’ country-by-country data show about a third of the world’s 93.5 million new cars made in China in 2023, and a sixth in the U.S./Canada/Mexico:
World Vehicle Production: | 93.5 million |
China | 30.2 million |
European Union | 14.3 million |
(Germany) | 4.1 million |
(France) | 1.5 million |
(Slovakia) | 1.4 million |
(Czechia) | 1.4 million |
(Italy) | 0.9 million |
United States | 10.6 million |
Japan | 9.0 million |
India | 5.9 million |
Korea | 4.2 million |
Mexico | 4.0 million |
Thailand | 1.8 million |
Canada | 1.6 million |
United Kingdom | 1.0 million |
All other | 10.9 million |
OICA’s production and sales data.
And from the Commerce Department, U.S. automotive trade data, sadly updated only through 2021.
And a note on balances:
The Trump administration’s 2018 “President’s Trade Agenda” report uses trade balance as the main grounds to renegotiate NAFTA:
“[O]ur goods trade balance with Mexico, until 1994 characterized by reciprocal trade flows, almost immediately soured after NAFTA implementation, with a deficit of over $15 billion in 1995, and over $71 billion by 2017. … USTR has set as its primary objective for these renegotiations – to improve the U.S. trade balance and reduce the trade deficit with the NAFTA countries.”
As of 2023 — three years into USMCA — this same “goods trade balance” with Mexico was -$152 billion in deficit, and with Canada -$25.8 billion. So, pretty total failure here, with both deficits doubled. The reason for this, though, isn’t any particular problem with the new agreement’s text or legislative drafting, though. Rather it’s that the Trump-era policy designers didn’t understand trade balances and promised something the agreement couldn’t deliver.
The U.S. trade balance is the difference between national savings and national investment. The nearly simultaneous 2017 tax bill raised fiscal deficits, and therefore reduced government savings. Unless for some reason families and businesses started to save more (and they didn’t), the overall U.S. trade deficit was naturally going to rise as a result. With tariffs on China pushing U.S. purchasing of some formerly Chinese-made refrigerators, TV sets, clothing, etc. into other countries (especially Vietnam but also Mexico), the U.S.-China “bilateral” deficit dropped a bit, but this forced a larger increase with other countries, Mexico and Canada among them.
Ed Gresser is Vice President and Director for Trade and Global Markets at PPI.
Ed returns to PPI after working for the think tank from 2001-2011. He most recently served as the Assistant U.S. Trade Representative for Trade Policy and Economics at the Office of the United States Trade Representative (USTR). In this position, he led USTR’s economic research unit from 2015-2021, and chaired the 21-agency Trade Policy Staff Committee.
Ed began his career on Capitol Hill before serving USTR as Policy Advisor to USTR Charlene Barshefsky from 1998 to 2001. He then led PPI’s Trade and Global Markets Project from 2001 to 2011. After PPI, he co-founded and directed the independent think tank ProgressiveEconomy until rejoining USTR in 2015. In 2013, the Washington International Trade Association presented him with its Lighthouse Award, awarded annually to an individual or group for significant contributions to trade policy.
Ed is the author of Freedom from Want: American Liberalism and the Global Economy (2007). He has published in a variety of journals and newspapers, and his research has been cited by leading academics and international organizations including the WTO, World Bank, and International Monetary Fund. He is a graduate of Stanford University and holds a Master’s Degree in International Affairs from Columbia Universities and a certificate from the Averell Harriman Institute for Advanced Study of the Soviet Union.