Jeff Schuster, President, Americas Operation & Global Vehicle Forecasting

20 December 2019

Diminishing trade uncertainty gives the industry room to breathe

The global auto industry and overall economy have been operating in an uncertain trade environment for more than 18 months. Open risks have prevented companies from making strategic decisions and could potentially derail the global economy and stability in the automotive market. Although a permanent solution to the current uncertainty has, so far, proven elusive, recent measures have helped to lower the risk level.


The USMCA finally appears to be done a deal, although ratification by all three participating nations looks likely to be delayed until 2020. The agreement was modified slightly from the version originally presented in September 2018 to include:

  • Stronger enforcement of labour standards in the form of new benchmarks for Mexico’s labour law reform.
  • Added environmental protection via the creation of an interagency to monitor commitments in the region.
  • The removal of protections for the pharmaceutical industry by dropping a proposed ten-year protection on new biologics inventions.

The auto-specific content of the trade agreement is unchanged from the original version:

  • Regional content of a vehicle must be increased from 62.5% to 75% by 2023.
  • 40% of vehicle assembly must be at a minimum labour rate of US$16/hour by 2023.
  • Vehicles produced in North America that fail to meet these requirements will face a 2.5% tariff.
  • 70% of steel and aluminium must be purchased in the region, although enforcement is on hold until five years after the deal is fully ratified.

We expect the overall effect of the USMCA to be minimal at the topline level, but there may be an impact on sourcing decisions and pricing options for some vehicles currently built in Mexico. Moreover, certain rules and definitions of regional content still require clarification. In short, if vehicle prices are hiked to offset the substantial cost increases required to comply with the parameters of the agreement, then sales could be pulled forward, which may reduce future volumes.

US-China Trade War

A phase-one deal in the US-China trade war has been confirmed, covering agricultural products, intellectual property protection, currency manipulation and forced technology transfers by US companies doing business in China. That said, both parties are yet to sign the agreement.

The first phase will alleviate some of the tariff fears, given that its eventual outcome will be to phase out the existing tariffs, starting with the US shelving the planned December 2019 tariff and reducing the tariffs placed in September 2019 on US$120 billion of goods by 50%. The second phase is where the real substance and issues will be dealt with, and negotiations will reportedly start immediately. The auto industry will benefit from the tariff walkdown and some planning decisions should return to normal, but sourcing changes and investment plans are likely to remain on hold until the deal is finalised, which could take well over a year.


Brexit now appears more certain, following the Conservative Party landslide in the UK general election. With a majority government, PM Boris Johnson’s Withdrawal Agreement Bill is more than likely to pass, which would put the UK on track to leave the EU at the end of January 2020. But the ensuing transition period would, according to the terms of the agreement, last until the end of 2020.

There is no guarantee, however, that the UK will exit the EU by 31 December 2020 with a forward-looking trade deal. Indeed, a further extension of a year or two is entirely possible, not to mention the risk that trade negotiations could break down, which would culminate in the UK leaving the EU with no trade arrangements in place. The situation remains open-ended, but a ‘soft’ Brexit now seems more likely. Compared with a no-deal outcome, this would certainly provide greater stability for the economy, as well as the auto industry.

The auto industry will be looking for a quick resolution on a trade agreement to avoid potential vehicle tariffs and any further trade and supply-chain disruptions. In short, a ‘soft’ Brexit would lead to flat UK sales in 2020 and into 2021, followed by a recovery. A ‘hard’ Brexit, in contrast, could cut demand by as much as 300,000 units, or 12%.