Mexico-US deal includes an export cap on Mexican automobiles: sources

A proposed U.S.-Mexico trade deal would allow President Donald Trump to slap punitive tariffs of up to 25 percent on imports of Mexican-made cars, sport utility vehicles and auto parts above certain volumes, auto executives and sources said on Tuesday.

The United States and Mexico agreed on Monday to overhaul the North American Free Trade Agreement (NAFTA), pressuring Canada to sign up to new auto trade and dispute settlement rules to remain part of the three-way pact.

But a previously unreported side agreement between the two countries would allow the United States to pursue “national security” tariffs on annual Mexican car and SUV imports of over 2.4 million vehicles. The side deal would allow national security levies on auto parts imports above a value of $90 billion per year on the same grounds. The administration plans to announce the results of a probe into whether autos and part imports pose a national security risk in the coming weeks.

The study could be used to justify 25 percent U.S. tariffs on automotive imports on the basis that protecting the U.S. auto industry is vital to national security under a Cold War-era trade law.

Automakers are concerned that the agreement signals the United States will proceed with national security tariffs – and are likely to use the tariffs to win concessions from the European Union and Japan as well. They have said the tariffs could cost hundreds of thousands of jobs and dramatically raise vehicle prices.

A separate side-agreement lays out a possible scenario in which the United States increases its normal “most-favored nation” tariffs on autos, currently 2.5 percent. A potential new, unspecified rate would be applied to vehicles that do not meet the existing or revamped NAFTA.

MEXICAN EXPORT CAP

Mexico reserves the right to challenge the U.S. use of “national security” tariffs at the World Trade Organization, people briefed on the talks said.

Exports of cars and SUVs from Mexico would face a 25 percent U.S. tariff if they exceed 2.4 million vehicles and the United States imposes the national security tariffs, the sources said. Below the cap, vehicles that comply with new, tougher regional content requirements could enter the U.S. duty-free.

Vehicles within the cap which fail to comply with the new, tougher content rules would pay a 2.5 percent tariff, the sources said.

In 2017, nearly 1.8 million cars and SUVs were exported to the United States from Mexico.

The sources did not want to be identified because the details of the agreement have not been officially released.

U.S. officials have said the agreement is aimed at pulling more auto industry jobs into the United States and Mexico. Terms of the deal are not final, and could change depending on the outcome of negotiations between the United States and Canada, and other factors.

Duty-free auto parts exports from Mexico to the United States could be capped at $90 billion a year under the agreement, said Ann Wilson, senior vice president of government affairs at the Motor and Equipment Manufacturers Association.

The figure exceeds current levels, but parts shipments above that quota could be subject to 232 tariffs, Wilson said.

Mexican pickup trucks that do not comply with regional content quotas already pay a 25 percent duty. It was not clear whether they could also be subject to an additional quota.

Moises Kalach, head of the international negotiating arm of Mexico’s CCE business lobby, said it was far from certain the United States would impose the 232 tariffs, and that the current trading arrangements for the industry were now safeguarded.

“We have a fall-back plan if they impose the 232, but there’s also the possibility that Mexico is exempted from the 232,” Kalach told Reuters.

It is not clear how the quotas would be counted or administered.

The figure exceeds current levels, but parts shipments above that quota could be subject to 232 tariffs, Wilson said.

Mexican pickup trucks that do not comply with regional content quotas already pay a 25 percent duty. It was not clear whether they could also be subject to an additional quota.

Moises Kalach, head of the international negotiating arm of Mexico’s CCE business lobby, said it was far from certain the United States would impose the 232 tariffs, and that the current trading arrangements for the industry were now safeguarded.

“We have a fall-back plan if they impose the 232, but there’s also the possibility that Mexico is exempted from the 232,” Kalach told Reuters.

It is not clear how the quotas would be counted or administered.