California Gov-elect Newsom attended Andres Manuel Lopez Obrador’s inauguration and the trip came after recent news that NAFTA will likely be replaced by the USMCA (US-Mexico-Canada Agreement). The agreement was signed by leaders of Canada, Mexico, on the US September, however it still requires legislative approval. The next California Governor has a lot at stake and is developing his own relationship with Mexico’s President.
There is good reason for Governor-Elect Newsome to be developing his own relationship with Mexico. While the USMCA has wide-ranging implications for US trade, there are key considerations for California, the world’s 5th largest economy. According to the article, “Mexico is California’s top export market. Last year it accounted for 15.5% of all the state’s exports, according to the U.S. Department of Commerce. Top exports from California include electronics and computers, while the top imports from Mexico are cars, electronics and agricultural products.
According to Beacon Economics, Mexico remained California’s top export market in the third quarter of 2018 with shipments south of the border reaching $7.68 billion, up 14% from a year ago. By comparison, exports in the same period to China—the state’s third biggest market—dipped 5.3% to $3.94 billion and reflected the expanding trade war with Beijing.
California ranks as the world’s fifth largest economy, with gross state product last year totaling $2.74 trillion. Beacon estimates that the California’s stake in the modernized North American Free Trade Agreement has grown in the past year, reaching 28% of the state’s entire merchandise export trade in the third quarter of 2018 compared with 27% a year ago.”
The USMCA presents impacts for a number of industries in California’s Central Valley, which in many ways represents a large portion of California’s growth potential – especially in key manufacturing sectors. GLDPartners is developing a large-scale project in this region with Merced County. The Mid-California International Trade District is a 2,000 acre project is designed as a global logistics hub with air highway, rail and ocean connectivity and is a center for West Coast manufacturing, particularly for companies engaged in electronics, computers, automotive technology, industrial machinery, specialty chemicals and food production.
Capitalizing on adjacency to Silicon Valley, within the MCITD is the California Autotech Testing and Development Center which is a 700 acre center for auto technology testing, development and production. Silicon Valley has exploded to be a global center for the automotive industry as a research and development hub for the technologies driving autonomy, connected vehicle, safety systems and propulsion systems. The region is known for the presence of TESLA, but there are now hundreds of auto and tech companies taking advantage of the global-leading workforce and access to technology capital.
We believe that trade agreements will play a larger and larger role in the viability of US manufacturing and the USMCA will have a material impact. With that said, we’re quite concerned that overall US trade policy is going to be a major drag on investment development, in California and throughout the US.
As related to some of the ley sectors that are critical to California and MCITD project in Merced County, some of the highlights of what the USMCA calls for:
Country of origin rules: Automobiles must have 75% of their components manufactured in Mexico, the US, or Canada to qualify for zero tariffs (currently 62.5% under NAFTA).
What does it mean? Canada and Mexico comprise about half of the $360 billion in annual auto and auto part imports to the US. Eliminating the threat of 25% tariffs provide stability for North American auto companies in terms of vehicle costs to the consumer and jobs. Tariff rate proposals have also brought EU and Asian manufacturers into negotiations, including a trade agreement with South Korea.
Labor provisions: 40 to 45% of automobile parts have to be made by workers who earn at least $16 an hour by 2023. Mexico has also agreed to pass laws giving workers the right to union representation, extend labor protections to migrant workers, and protect women from discrimination. Countries can sanction one another for labor violations.
What does it mean? This clause benefits Mexican workers (who earn about a third of that) more than US and Canada auto workers, who typically earn over $16/hour already. In theory this could deter some US companies and suppliers from relocating to Mexico facilities. In addition, Mexico-built cars could become more expensive.
US farmers gain more access to the Canadian dairy market.
What does it mean? Canada opened up 3.6% of its dairy market to US farmers. The deal also rescinds a recent milk-pricing policy that was troubling for many US dairy farmers. While a political win, experts estimate that the economic impact will be somewhat marginal, including an estimate of annual exports to Canada increasing by $70 million, according to a BofA Merrill Lynch Global Research Report.
Steel and Aluminum Tariffs Remain
What does it mean? Section 232 of NAFTA has been used to impose steel and aluminum tariffs on Canada, Mexico, and the EU since early 2018. These will remain in place. This should provide some provide consistency and a competitive advantage for US-based producers. However, US wages in the steel and aluminum industry will continue to drive higher priced finished products.
“USMCA, Trump’s new NAFTA deal, explained in 500 words” https://www.vox.com/2018/10/3/17930092/usmca-nafta-trump-trade-deal-explained
Nafta Rewrite Eases Threat of Auto Tariffs on U.S. Economy
NAFTA — Now USMCA — Agreed to at Last
As Trump signs USMCA, California Governor-elect Newsom heads to Mexican president’s inauguration