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Nafta Rewrite Is Mixed Blessing for Foreign Car Makers

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10/01/2018 | 10:26am EDT

By Sean McLain and William Boston

A last-minute deal to revise the North American Free Trade Agreement offers assurances to foreign auto makers with plants in Canada and Mexico, but operations in the region could still be complicated by the pending agreement.

The U.S. and Canada late Sunday reached a deal to revise the trade pact that included a proposed side deal to limit the impact of national-security-related tariffs President Trump has threatened to apply to car imports.

Foreign car makers have invested heavily in plants in Canada and Mexico and produce some of their best-selling vehicles there.

German manufacturers have built several factories in Mexico and the U.S. over the past decade. Volkswagen also operates a huge plant in Puebla, Mexico, which exports Beetles and sedans to the U.S. Audi AG, VW's luxury unit, opened a plant near Puebla in 2015 to build SUVs. Nearly half the plant's production is exported to the U.S.

Toyota Motor Corp. relies on Canadian plants for nearly half its U.S. sales of the RAV4 crossover sport-utility vehicle. That dependence is set to increase after Toyota earlier this year announced plans to spend nearly a billion dollars to double RAV4 production in Canada. Toyota also plans to open a new plant for Tacoma trucks in Mexico next year.

A Toyota spokesman declined to comment on the draft agreement, which will be called the U.S.-Mexico-Canada Agreement, or USMCA. The deal must be ratified by Congress before it goes into effect.

The auto industry was a big factor in reshaping Nafta after Mr. Trump threatened in May to tax all auto imports in the name of protecting U.S. national security, with Mexico and Canada eager to craft terms that would shield them from such tariffs.

Trade groups have objected to the notion that car imports present a national security threat to the U.S., warning that any tariffs would result in job losses there.

Tariffs on vehicle imports could add as much as $2,220 to the cost of a vehicle, according to the Michigan-based Center for Automotive Research. Toyota has said a 25% tariff -- which Trump has threatened -- would drive up the cost of a U.S.-made Camry sedan by $1,800.

The revised trade pact proposes to exempt up to 2.6 million vehicles imported from each Canada and Mexico from those tariffs, according to drafts posted on the website of the U.S. Trade Representative. Auto parts shipments would also be exempted up to a certain limit for both countries.

Last year, Mexican factories produced about 2.3 million of the vehicles sold in the U.S., and Canadian plants accounted for an additional 1.8 million, according to LMC Automotive, which tracks automotive sales.

The agreement doesn't give much detail on what will happen should exports surpass the 2.6 million vehicle limit, specifying only that the countries will decide which vehicles are excluded from any tariffs.

"Are we going to have car carriers racing across the Sonoran Desert to get to the border first?" said Christopher Richter, an auto analyst for CLSA. He suggested that a cap on exports from Mexico could prompt auto makers to be more selective in what cars they export to the U.S., perhaps cutting back on smaller vehicles as Americans increasingly turn to roomier SUVs.

However, while the trade deal may reassure foreign car makers about the financial stability of their Canadian and Mexican plants, other provisions in the main agreement could complicate their operations.

One provision requires cars imported from another Nafta country to contain 75% North American content, up from 62.5% currently.

That could pose a challenge to the likes of Toyota and Nissan, which rely heavily on engine and transmissions imports from Japan for many of their vehicles.

Daimler, BMW and Volkswagen import the engines for their vehicles from Europe and China. It would be costly and have a considerable impact on their European plants if they were to produce those engines in the U.S., analysts said.

The deal also has measures to promote wage increases in Mexico that could weigh on the profitability of plants there. New rules require at least two-fifths of a vehicle to originate from workers earning at least $16 an hour to be eligible for duty-free trade in North America.

Overall, while the proposed deal doesn't completely eliminate the threat to car makers, it does provide much-needed reassurance, said Takaki Nakanishi, a Tokyo-based auto analyst. He said: "We can start to see an exit point" from the uncertainty.

Write to Sean McLain at sean.mclain@wsj.com and William Boston at william.boston@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
BAYERISCHE MOTOREN WERKE AG 5.80% 43.78 Delayed Quote.-20.47%
DRAFT INC. 0.26% 1157 End-of-day quote.0.00%
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