New trade agreement terms favor high-wage labor

Dairy, cultural protections, and dispute resolution measures remain as the final core obstacles for the US-Canada closure of the second phase of NAFTA-replacement negotiations.  On August 27th, President Donald Trump announced that the United States and Mexico reached an new agreement on trade that would replace NAFTA. During the 2016 elections, both political parties railed on NAFTA and promised reforms and renegotiation. President Trump has made good on those promises by coming to terms with outgoing Mexican President Enrique Peña Nieto.  While there is risk of a broken agreement by both congress after their 90-day review period, and by Mexico’s incoming president, Andrés Manuel López Obrador, when he takes office, neither seems likely.

The US-Mexico Trade Agreement mainly focused on automotive labor regulations, while the Canadian deal is being held up by smaller, more symbolic measures. US-Canadian negation tensions run high on both sides, an Canadian President Justin Trudeau has echoed Trump’s priority for only completing a good deal for their respective countries by saying, “no NAFTA deal is better than a bad deal.”

If Canada does not join the US-Mexico Trade agreement, the implications of the higher wages needed to avoid US tariffs will become even more severe, as using Canadian parts may bear new financial consequences.  As suppliers think about future consolidation and cost-reduction measures, they will need to be cautious of the OEM’s content requirements and ensure that they will be able to deliver certain parts at the appropriate $16 per hour wage.  At four times the cost of Mexican counterparts, the pressure to develop a highly-skilled US workforce leveraged with automation will be stronger than ever. Although the media promises higher prices to consumers if the tariff landscape with Canada worsens, that cost increase will undoubtably be shared with manufacturers. The suppliers who are able to accomplish the most with their US-based employees will have a significant advantage under this new trade agreement.

Anh Nguyen and Justin Fortier are analysts at Seraph, a management consulting firm that works with clients to transform, relocate, or restructure business operations. They frequently work with the client teams of leading international companies in the automotive, aerospace, energy infrastructure, and medical technology/device sectors.