The new North America trade deal USMCA punishes German cars

US President Donald J. Trump, joined by Cabinet members, legislators and senior White House advisers, announced the completion of the United States-Mexico-Canada Agreement. Monday October 1, 2018. (Official White House Photo by Stephanie Chasez)

The North America Free Trade Agreement (NAFTA) is dead. Long live the new United States, Mexico, Canada Agreement (USMCA). The three North American nations will continue trading goods of a value of at least $ 1.2 trillion yearly between them. The US President Donald Trump had termed NAFTA as the worse trade deal his country had ever signed and wanted to change it. Now, he boasts that the new agreement offers to the American working people hundreds of thousands of new jobs.

The truth is, though, that the USMCA may differ from NAFTA in some respects, but the main modification in the workings of the vast three nations market, is that imports from other countries are being severely punished. In particular, cars built in Mexico by foreign companies will from now on face mounting difficulties when crossing the American borders. Easy to find out who is assembling automobiles in Mexico and selling them to America; it’s the German automotive majors.

Punishing car imports

On top of that, Trump sent a letter to Mexico and Canada negotiators, saying the US reserves the right to impose extra tariffs on all cars imported in America. In such an eventuality, America’s two USMCA partners will each be accorded a tariff free export quota of 2.6 million passenger vehicles. Pickup trucks will not be counted in this allocation and will be exported from the two neighbors to the US tariff free. Trump’s letter is to be included as an addendum in the new North America trade deal.

Easy to understand why the US President wants to reserve this option for Washington. Trump has, more than once, threatened to impose 20% to 25% extra imports tariffs on automobiles assembled in Europe. Again, it’s not difficult to find out who sold 1.35 million cars in the US last year. It was the four big German car producers, who control around 8% of the US market. Of those vehicles, 494,000 were exported directly from Germany to America. The rest were produced either within the US or in Mexico. Rightly then Berlin does to prepare for the worst, in order to protect its export dependent economy.

Canadian losses

In short, the new North America trade deal is to bring about new barriers regarding the imports of German cars in the US. The USMCA also secures some more gains for America, in the trade with Canada. This last country was forced to open her dairy and cereals (mainly wheat) markets to American exporters. The Canadian government acknowledged the setback and rushed to say the affected farmers will be compensated.

Coming back to German cars, it was obvious that Trump had not forgotten his threats, to never again see any Mercedes or BMWs speeding down New York’s Fifth Avenue. The German carmakers assembling automobiles in Mexico are on the spot. The USMCA trade deal foresees that any automotive company operating in Mexico – of which most are German – in order to export tariff free automobiles to US, have to fulfill a number of conditions. Firstly, the cars must incorporate North American added value of at least 75%. Currently, this percentage is 62.5%. However, since all engines are imported from Germany, this term will be very difficult to fulfill.

Targeting German cars

The German firms are also obliged to prove that their cars assembled in Mexico, incorporate added value of at least 40% produced by workers earning at least $16 an hour. For one thing, the German automakers have gone to Mexico to take advantage of cheap labor. They actually pay their workers much less than that. Last but not least, 70% of the steel and aluminum used in the production of German cars in Mexico, must have been sourced within the USMCA region, in order those vehicles to be exported tax free to the US.
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Al in all, the German cars produced in Mexico will have a very difficult time in order to cross the US borders. Even more alarming for the German automotive industry is Trump’s above mentioned reserve, about imposing super levies on all US car imports. Last Monday this newspaper reported that the Germans are preparing for this scenario. The five most respected economic institutes of the country published a study, concluding Germany must not exclude this dreadful eventuality.

Berlin prepares for the worst

The European Sting leading article of 1 October noted: “For the time being, Washington has refrained from realizing its threat to punish EU assembled cars with tariffs of 20% to 25%. This eventuality has not disappeared though”. If this is the case Germany is to suffer a strong blow to her economic growth potential, with repercussions on the country’s welfare. Still, Germany appears ready to swallow any American challenge, in order to safeguard what can be saved in the complex trade and otherwise relations between the two countries. In this respect, Berlin is trying hard to soften Brussels’ retaliation vis-à-vis the American trade aggression.

In the same line of thinking, Berlin is working hard to protect Germany’s economic interests in Iran and Turkey. In both cases and more so for Iran, the US has imposed new and severe sanctions aimed at suffocating the country’s foreign trade. In the case of Turkey, Angela Merkel’s government appears ready to suffer important political cost internally, in order to maintain a good level of working relations with the Turkish ‘Sultan’, Tayyip Erdogan’.

Despite the strong protests and street rallies during Erdogan’s visit to Berlin last week, the German industrialists said ‘business as usual’ with Turkey. No matter if Turkey jails German journalists without trial. Berlin is ready to oversee all that, in order to keep the Turkish markets open. Germany and the EU have also undertaken equally arduous efforts to keep the Iranian market accessible, by evading Washington’s measures against Tehran.

In conclusion, Germany is ready to do what it takes to protect her export markets. More so because of the worsening European Union’s internal problems, with a possibly no-deal Brexit and the growing Italian risks.

 

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