Shares of big U.S. automakers climbed on news that the U.S. and Mexico have reached a preliminary deal to update the 25-year old North American Free Trade Agreement, but experts warned that the deal is too narrow to have a major impact on carmakers' fortunes.
General Motors, Ford Motor, and Fiat Chrysler all jumped on trading Monday, as Donald Trump announced the agreement at the White House. Here's how they responded: GM and Fiat-Chrysler rose 4.3 percent, while Ford increased 2.8 percent.
But U.S. Trade Representative Robert Lighthizer, said the deal —that would be called The United States-Mexico Trade Agreement — would not undo the 25 percent tariffs on steel and aluminum that have raised costs at GM and Ford this year.
And experts on U.S.-Mexico trade said that the need for congressional ratification of the deal, coupled with the prospect that the president's party could lose control of the House of Representatives or the Senate in November's election, means that the agreement isn't likely to push shares meaningfully higher.
"There's a very good chance this will never see the light of day," said Frank DuBois, a professor at American University's Kogod School of Business and head of the Made in America Index, which tracks the domestic and imported content of every car model sold in the U.S. "Auto companies will pressure Congress to leave well enough alone."
The new deal will last 16 years and will be reviewed every six years. It will not cap imports of light vehicles from Mexico.
The deal's provisions allow for import tariffs on cars and trucks that do not get at least 75 percent of their content from within the NAFTA region of the U.S., Canada and Mexico, or use a higher proportion of labor that makes at least $16 an hour. That provision would incent car makers to push more of their production into the U.S. or Canada from lower-wage Mexican plants, or buy more parts from outside of Mexico.
The expected impact is that makers of cars from existing Mexican plants will pay import duties of 2.5 percent when they are sent to the U.S., DuBois said. But vehicles made in newly-built plants will pay 25 percent. On paper, that gives U.S. automakers a powerful incentive to build in the U.S., but the likelier outcome is that automakers will hold off siting any new plants for as long as they can, DuBois said.