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US-Mexico deal may boost auto steel usage

Aug 27, 2018 | 05:24 PM | New York | Dom Yanchunas

Tags  Nafta, cold-rolled coil, rules of origin, AISI, Donald Trump, Enrique Peña Nieto, Dom Yanchunas

A tentative trade agreement between the United States and Mexico includes a provision increasing the minimum percentage of a new automobile's content that must be sourced in either of those two countries, potentially driving higher demand for homegrown steel.

Two of the three parties to the North American Free Trade Agreement (Nafta) confirmed a preliminary bilateral accord on Monday August 27. New standards were established for auto inputs, labor, intellectual property and the cross-border flow of food and agricultural goods. 

A statement from the Office of the US Trade Representative on Monday confirmed that the deal includes "new rules of origin and origin procedures, including product-specific rules for passenger vehicles, light trucks and auto parts." The previous Nafta standard was 62.5% intra-regional value for cars and trucks and 60% for auto parts.  

"This deal encourages United States manufacturing and regional economic growth by requiring that 75% of auto content be made in the United States and Mexico," the US Trade Representative said. 

For that reason, the preliminary pact announced by US President Donald Trump and Mexican President Enrique Peña Nieto drew praise from the American Iron and Steel Institute (AISI). 

"We support strengthened rules of origin for autos that will further incentivize the use of North American steel in automobile production throughout North America," the AISI said in a statement. "[Monday's] announcement by the United States and Mexico is an important first step toward ensuring continued robust intra-Nafta trade and investment, but it is now critical that Canada be included in the negotiations and that a new trilateral agreement be reached.”

American Metal Market's pricing assessment of US domestic cold-rolled coil stands at $50 per hundredweight ($1,000 per ton). The price has risen 19% in the year to date. 

AISI, the Steel Manufacturers Association and the National Association of Manufacturers (NAM) on Monday all said the broader Nafta has been beneficial to the US industry and they hope Canada ultimately will be included in a new trilateral structure. 

In a televised speaker-phone conversation from the Oval Office, Trump and Peña Nieto said the next step is to re-engage Canada in subsequent talks. In the meantime, Trump faces a mandatory 90-day pause while Congress considers the new deal, which would potentially be a partial replacement for Nafta. 

Peña Nieto was conciliatory in stating that "our wish is that now Canada will be incorporated in all this." By contrast, Trump emphasized that he dubbed Monday's deal the "United States-Mexico Trade Agreement" and called the legacy Nafta agreement "a ripoff." He renewed a threat to slap tariffs on Canadian-made autos crossing into the US. 

"We are starting negotiations with Canada pretty much immediately," Trump said. "It will be either a tariff on cars or a negotiated deal."

The US and Mexico agreed that 40-45% of automobile content must be produced by workers earning a minimum of $16 per hour.

The Alliance of Automobile Manufacturers said its was "pleased that the US and Mexico have reached a consensus on several issues," including on the rules-of-origin question.  

“Automakers urge the US and Mexico to quickly re-engage with Canada to continue to build on this progress," the auto alliance said in its statement. "The industry is hopeful that any changes to Nafta auto rules of origin continue to strike the right balance by incentivizing production and investment in North America while keeping new vehicles affordable for more Americans.”

Monday's announcements made no mention of amending Mexico's treatment under Trump's Section 232 orders. Discussions emerged last week over the idea of Mexico accepting quotas on exports to the US instead of the current 25% tariff.  

The Trump administration apparently dropped its insistence on a five-year sunset clause for new Nafta-related assurances. 

NAM said Monday's pact "does not include language incorporating the disruptive uncertainty of ending the agreement every five years... and instead establishes a vigorous review process."


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