August 28, 2018 1:50 pm
Updated: August 28, 2018 1:58 pm

Why U.S.-Mexico’s NAFTA agreement could be good news for Canada’s auto industry

WATCH: Trudeau still pushing for NAFTA deal despite Trump comments to replace agreement

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Mexico and the United States announced a tentative trade agreement to replace NAFTA Monday, which provided a sigh of relief from automakers.

And it could mean good news for the Canadian auto industry, too — if and when the Trudeau government agrees to the terms.

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Jon Johnson, a senior fellow at the C.D. Howe Institute for research, told Global News that it seems Canada will agree to the laid-out terms.

“I don’t think Canada has a great deal of problems with the details,” he said. “What I hear from the Canadian auto industry is essentially they can live with it.”

The revised terms announced by the two countries were less dramatic than U.S. President Donald Trump had previously threatened.

READ MORE: The end of NAFTA? What the U.S.-Mexico trade deal means for Canada

The U.S. and Mexico agreed that 75 per cent of automotive content (up from the current level of 62.5 per cent) be produced within the trade bloc to receive duty-free benefits.

The pact also stipulated that 40 to 45 per cent be made by workers who earn at least US$16 an hour.

Those changes are meant to encourage more auto production in the U.S.

Details still unclear

Johnson explained that those are all potentially agreeable terms for Canada, but it’s tough to know with such limited details.

“What the Americans and the Mexicans have reached is at best a very sketchy understanding, and … when you get into the weeds of these things, you ask ‘how is it going to work?'” he asked, noting that it’s difficult to know the actual effects of the deal until there is a full and final document provided.

WATCH: New NAFTA deal between US and Mexico doesn’t include Canada

He explained, for example, that requiring 75 cent of parts made in Canada, U.S. or Mexico doesn’t mean much until it’s made clear which auto parts are included in that provision and which are exempt.

“It depends very much on how you make that 75 per cent calculation, as compared to how it’s done under the current NAFTA.”

Effects of $16 wage provision

The $16 base pay could harm Mexico where, as the Center for Automotive Research explains, workers make an average of $3.41-$7.34 an hour.

According to the research centre, Canada pays its workers between $20.70 to $28.98 per hour on average — roughly $1 more than the U.S. pays on average.

WATCH: Is NAFTA dead?

Bill Anderson, director of the University of Windsor’s Cross Border Institute, said that the wage provision would help Canada’s sector.

READ MORE: Trudeau phones Trump to discuss trade as Mexico calls on Canada to return to NAFTA talks

“Essentially it’s a way of excluding Mexican content, so even though Canada and Mexico have presented a united front, you now have a situation where you could make the argument this will benefit Canada,” said Anderson.

“On that particular issue, what benefits the United States also benefits Canada.”

While it’s still early to know whether Canada would gain jobs, Johnson said the effect would not be “negative.”

He noted, however, that enforcing a rule like $16-minimum wage for some workers across three countries seems very difficult.

“I can’t get my head around how you would administer this,” he said. “You’d have to somehow trace parts to factories, then link them with wage rates, and so on.”

Car companies ‘optimistic’

If cars meet these terms, they can be imported without tariffs, and that is good news for major automakers such as General Motors, Fiat Chrysler and Toyota Motor Corp.

Shares for these companies jumped Monday as the deal appeared to end the uncertainty that has dogged the sector for months.

WATCH: Trump announces United States/Mexico trade agreement, says NAFTA is over

Matt Blunt, president of the American Automotive Policy Council, which represents GM, Ford Motor Co. and Fiat Chrysler, said the group was optimistic about the new deal, though it was still reviewing the details.

“We are optimistic that the new agreement will maintain and encourage the ongoing competitiveness of the United States and North American auto industries,” a statement read.

Other automakers also had positive remarks about the news.

READ MORE: Chrystia Freeland back in Washington for urgent NAFTA negotiations after U.S., Mexico strike deal

“Toyota is pleased to hear that progress is being made by U.S. and Mexico negotiators to reach a consensus on modernizing NAFTA,” the carmaker said. “We are hopeful that any changes are fair and balanced.”

Nissan said it was “encouraged that an agreement was reached, and hope that it appropriately considers the impact on our employees, suppliers and customers.”

Will Canada sign?

Avery Shenfeld, chief economist at CIBC Capital Markets, told Global News that the bilateral agreement between Mexico and the U.S. essentially is putting pressure on Canada to sign the deal.

Shenfeld agreed that he auto sector is unlikely to be a sticking point for Canada, which wouldn’t be harmed by the $16 wage provision, and previously appeared open to higher auto content rules in the past.

Scotty Greenwood of the Canadian American Business Council explained that there could be a trilateral agreement within a week.

WATCH: What’s next for NAFTA?

“Though Canada hasn’t been physically in the room the last five weeks, Canada has been at the table for the last year and Canadian ideas, particularly on auto rules of origin, have been in the room and present in the negotiations,” Greenwood said.

Prime Minister Justin Trudeau also added on Tuesday that officials are working to “conclude an agreement that is win-win-win.”

— With files from Global News reporter Erica Alini, The Canadian Press and Reuters

© 2018 Global News, a division of Corus Entertainment Inc.

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