Our government has gotten the ball rolling on revisiting the North American Free Trade Agreement with our trading partners to the north and south. Below is an update on the renegotiation.
In late June, the public comment period ended with a public hearing in Washington, D.C. This month, the U.S. must publish a detailed summary of its objectives for the negotiations on a publicly accessible website. Assuming this deadline is met, negotiations could begin as early as mid-August. Mexico and the United States have suggested that their goal is to wrap up negotiations by the first quarter of 2018, an ambitious timeline given the Mexican presidential elections this fall could change the composition of the negotiation team. Canada is prepared to meet their Washington counterparts with hard data on the impact of NAFTA on the U.S., segmented by congressional district. Mexico and Canada are working together on key issues including maintaining the trilateral composition of the agreement.
Why are these new negotiations important to AMT members and the industry? NAFTA has expanded U.S. trade of capital equipment throughout North America. Without it, trade agreements that Mexico negotiated with the EU and Japan would have clearly given those countries’ manufacturers a significant advantage in what is currently the top export market for U.S. manufacturing technology.
AMT, like many manufacturing organizations, advocates for a trilateral NAFTA renegotiation. We also support a comprehensive review of the current agreement including trade provisions that could impact future agreements with all other countries. If done well, the NAFTA revision could serve as the prototype for any future trade agreements.
U.S., Mexico and Canada: three healthy manufacturing markets
Mexico’s Growth Domestic Product (GDP) is expected to double in 2017, a big turnaround from the slight decline in 2016. Meanwhile, Canada’s GDP is expected to grow a whopping 66 percent to 2.5 percent in 2017 and the United States is expecting to post a 3.4 percent increase in GDP. Industrial production indices for all three countries are moving upwards as well, with the 4.3 percent growth in Canada’s index reflecting an acceleration out of the doldrum manufacturing sector in 2016.
Canada is the third largest market in North America for manufacturing technology representing more than $1.7 billion dollars, most of that purchased from U.S. builders and suppliers. While the growth in demand blossomed in Mexico in 2015 and 2016, slower growth rates are anticipated in 2017 and 2018. Notably, Canada is experiencing a turnaround in its manufacturing technology market that warrants a deeper look at the country’s potential customers. With a distribution system like the United States, English as one of the two national languages, and a very cordial culture, Canada is a relatively easy market to explore. A renegotiation of NAFTA could provide further incentives and make market access even easier in that market to the north.
NAFTA and the auto industry
NAFTA has increased trade between the U.S., Mexico and Canada significantly over the past two decades, but some industries have benefitted more than others. The auto industry has certainly benefitted. This is important to our industry because about one in four dollars spent on manufacturing technology in North America is an investment by the auto industry or its first-tier suppliers.
In early June each year, the Chicago Federal Reserve Bank produces an automotive conference at its satellite branch in Detroit— excellent speakers, excellent content. The consensus at this year’s meeting was that the auto industry has challenges in its future as demographics and technology suggest a significantly different landscape in the next eight to 30 years.
Demographics wreak the greatest havoc on demand for new cars. Young couples are waiting longer to get married, which leads to buying homes, children and multiple vehicles. Newer generations are waiting longer to drive, and even after they learn to drive, 20- and 30-year-olds are more likely to use Uber or rent by the hour at mass transit hubs and arenas.
This phenomenon is not so much a generational issue as it is a financial one. The average dollar amount for a new car loan has risen by 20 percent in the past three years to just shy of $30,000, leading the length of loans to grow dramatically in the past five years. Today, 80 percent of the car loans in place are for periods greater than five years. The only debt growing more quickly than auto loan debt is student loan debt, another financial stress for young adults looking to buy a car. As a result, analysts at the Chicago conference are projecting a cyclical peak in new auto sales in 2018 near 17 million units.
In the short-run, technology advances and CAFE requirements will encourage significant investment in new transmission and power train component design and production over the next eight years. Billions of dollars of new investment have been announced to address 10- and 12-speed transmissions and new transmission technology. Hybrids continue to represent a bridging technology from internal combustion engines (ICE) to totally alternative fuel technologies. Volvo recently pledged to transition 100 percent away from ICE-only vehicles to hybrids and electric-only units by 2019. Even with this change, Volvo doesn’t expect to move entirely away from combustion engines in their vehicles for well over a decade. The capital spending outlook by the auto industry appears to be promising in 2017 and 2018 related to product changes, but a cyclical downturn in sales would likely soften capital spending in 2019 and 2020.