USMCA vs NAFTA, explained with a toy car

This is a 1993 Chevy Suburban. And this is a 2018 Chevy Suburban. The 1993 one cost $21,000 brand new and 2018 one costs $47,000.

But if we adjust the price for inflation, the 1993 Suburban would cost $42,000 today. Even though the 2018 model comes with modern features like a back up camera, remote engine start, and ya know - airbags - the cost hasn’t changed much in 25 years. It’s not just the Suburban — the average price of new cars has risen only 7% since the early '90s.

While the price for almost all other goods has increased by 86%. And that, is thanks to NAFTA. “The nations of North America are ready.

” “Strengthened by the explosion of growth and trade” “To recognize that there is no turning back from the world of today and tomorrow. ” When the North American Free Trade Agreement took effect in 1994, it was the first major trade deal of its kind. The US, Canada and Mexico agreed to eliminate tariffs, which are taxes on most imported and exported goods.

The countries hoped it would increase investments and that by strengthening Mexico’s economy, it would slow illegal immigration. The trade agreement benefited the auto industry in particular. It allowed automakers to keep costs down, because cars and auto parts could be traded for free.

Well, for the most part. If at least 62. 5% of a car’s parts were sourced from North America, it would be tariff-free.

Cars that didn’t meet the requirement, or were made overseas, would be slapped with a 2. 5% tariff. NAFTA also gave automakers the ability to source cars where costs were lowest.

By comparison, a car made in Mexico costs $1,200 less than one built in the US because labor and the parts are cheaper. “As an industry, we’ve kind of performed some economic miracles when it comes to keeping cars affordable by being able to source some of those 30,000 parts from, you know, the least expensive places. ” Let’s take this model of a 2014 Ford Mustang for example.

It’s engine was built in the U. S. , but it’s manual transmission came from Mexico.

It's impossible for a consumer to easily find out where each individual part came from, but it’s likely the doors were molded in Canada. The speedometer came from Germany or China, which was assembled in the US, but then sent to Canada to be installed into the dashboard. The seatbelts did come from a company in Japan.

But the seats were probably made in Mexico. The tires most likely came from South Korea. In the end, the 2014 Mustang was built in Detroit, but with only 65% of its total parts sourced from North America.

It made the tariff cut. And Ford is in no way the only company who does this. About three-quarters of the cars sold in the US meet the standards to avoid tariffs, including most cars produced by the top four auto brands.

The US is actually producing more cars now than before NAFTA. Same for Mexico and Canada. But you wouldn’t know that if you listened to politicians.

“NAFTA was a mistake. ” “The single worst trade deal ever made, by any country, anywhere in the world. ” “Instead of creating jobs, NAFTA cost us jobs.

” In the auto industry alone, a third of US auto manufacturing jobs have disappeared since NAFTA was signed. As the same types of jobs have grown in Mexico. But in reality, that may have less to do with NAFTA, and more to do with automation.

Researchers have found that fewer than 5% of US jobs lost from sizable layoffs can be blamed on trade with Mexico. But the timing of these manufacturing layoffs, in lots of different industries, made it easy to point the finger at NAFTA. So while most Americans think the trade deal was good for the US, those that feel they were directly affected are passionately against it.

And this opposition is why President Trump is following through on a campaign promise. “A brand new deal to terminate and replace NAFTA called USMCA. It sort of, just works.

MCA. ” But this isn’t a much of a new deal. While it’s essentially a re-branding of NAFTA, it does make one major change to the auto industry.

Because it would require cars be made with 75% North American sourced parts. And that 40-45% of those parts must be made by workers who earn at least $16 an hour. At least 46 and as many as 125 cars sold today, that aren't taxed under NAFTA, wouldn’t qualify under the proposed USMCA regulations.

Our 2014 Mustang likely wouldn’t meet the new requirements. So if it is implemented, auto manufacturers will have to decide to just pay the 2. 5% tariff or change how they manufacture their cars sold in North America, even if it increases production costs.

"What looks small on paper, when you think about the complexity and how many parts are on every car, it starts getting out of hand fast. ” Prices of those cars could go up anywhere from $470 to $2,200 dollars in the US. And at these higher prices, roughly 60,000 to 150,000 fewers cars would be sold in the US each year.

That would mean job losses. “I don’t want to see our companies leave and fire our workers. Those days are over.

” But the USMCA could actually incentivize car companies to leave North America. NAFTA made US car companies more competitive with the global market, and even attracted foreign car companies to build in North America. And if those cars are going to face higher costs of manufacturing and tariffs - their production might get moved to China or other countries.

Building a car with thousands of parts is an incredibly complicated process. So while NAFTA has kept cars pretty cheap to produce, the USMCA could change that. And consumers will likely be the ones to pay the price.