by Mitch Kokai
Senior Political Analyst, John Locke Foundation
Over the course of the last year and a half, the administration has imposed tariffs on metals, along with many other intermediate and final goods. Part of the USMCA would require that more auto parts be made in the United States and more compensation be subjected to higher minimum wages in order to benefit from the zero tariff rate between Mexico, the United States, and Canada. When faced with a steep penalty for buying foreign goods, the belief is that consumers and both foreign and domestic companies producing goods in the United States will have no choice but to buy everything they need here at home.
That’s unlikely. There’s a reason why businesses set up their supply chains globally instead of domestically. It allows them to get the highest quality parts for the lowest prices. When production becomes more expensive in the United States, businesses raise their prices and are less competitive.
Consider the automobile industry. When and if the USMCA becomes the law of the land, automakers will face higher costs. That’s on top of the metal price hikes thanks to Trump’s tariffs. Some auto producers might change their supply chains to conform to the new trade deal, but others might decide instead to pay the current 2.5 percent tariffs on imported parts. Either option raises production costs as well as prices in showrooms. And fewer automobiles are produced in the United States.
As in many other industries, the auto industry’s future is in exporting. Raising U.S. auto-production costs makes it more difficult for companies producing cars here to export them to countries where consumers can choose not to buy Trump-induced expensive cars.