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US Avoids A Disastrous Trade War With Mexico Thanks To NAFTA Deal

Government / 112 Comments

Now, time for Canada.

In recent months, it seemed like we were on the precipice of a trade war with our closest trade partner, Mexico. President Donald Trump specifically targeted automakers with plans to build cars in Mexico, telling them that if they built cars there, they would have to pay a "big border tax." One of Trump's biggest promises during his campaign was to renegotiate the North American Free Trade Agreement (NAFTA), and Automotive News reports that the United States and Mexico have finally reached a deal.

The preliminary deal was announced on Monday and allows automakers to import vehicles duty-free if they contain 75% parts content from the US and Mexico (up from 62.5% under previous rules). It also stipulates that 45% of parts need to be made by workers who are paid at least $16 per hour.

In a separate report by Automotive News, the Mexico's economy minister Ildefonso Guajardo confirmed that close to 70% of the country's auto exports were light vehicles that would meet the new standards. The deal is set to kick in starting January 2020, with a gradual transition through 2023.

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This is a huge bullet dodged as we avoid a trade war with Mexico. The Trump administration initially proposed an 85% requirement for NAFTA-sourced content as well as a 50% US-sourced provision, but fortunately, the administration backed off the stance. Automaker's stocks have been rising upon hearing this news, which is good news for the auto industry.

Cars that do not meet these new requirements will be subject to a 2.5% tariff, the same amount levied on countries with the most favorable status in the World Trade Organization. Now all that's left is to reach a similar arrangement with Canada so we can put our fears of a trade war to bed for good.