US, Mexico pact may alter steel, Al tariffs

　　The bilateral trade understanding with Mexico, which has yet to be finalized, resolves a key point of contention between the US and Mexico over automobile trade that US President Donald Trump used as a basis to impose a 25pc tariff on steel and 10pc tariff on aluminum from Mexico and Canada earlier this year after Nafta renegotiations failed to produce an agreement more favorable to the US.

　　Trade agreements with Canada and Mexico and the prospect of a deal with the EU "hold the keys to eventual US [steel] pricing normalization, particularly for US [hot-rolled coil] pricing," should tariffs translate into quotas or more open trade agreements, Cleveland-based investment bank KeyBanc said in a research note today.

　　Domestic steel prices rose sharply across most grades in response to the tariff, boosting the cost of steel used in oil and natural gas pipelines and other raw materials for US manufacturers.

　　The US-Mexico agreement does not address the steel and aluminum tariffs directly. But US trade representative Robert Lighthizer told the senate appropriations committee in July that the administration expects an agreement on steel and aluminum to be part of a successful Nafta renegotiation without saying what such an agreement would include. Mexico's economy secretary Ildefonso Guajardo echoed similar sentiment in comments yesterday.

　　The US has agreed to steel export quotas with other countries in exchange for tariff exemptions.

　　The US exempted Argentina and Brazil after the countries agreed to a quota on steel exports to the US, while South Korea's exemption was tied to a quota on steel imports as well as a renegotiated trade deal that gives US automakers greater access to the South Korean market.

　　The key provision of the Trump administration's understanding with Mexico requires automakers to produce 75pc of the value of the content of passenger vehicles, light trucks and auto parts in the US and Mexico to cross the border tariff-free, up from 62.5pc under Nafta.

　　The US had pushed for 85pc with at least 50pc produced in the US, while Mexico's auto industry had lobbied to keep the threshold unchanged. At least 40-45pc of the content of vehicles must be made by workers earning a minimum of $16/hour.

　　The American Iron and Steel Institute (AISI) lauded the changes in a statement, saying the stronger rules of origin will "further incentivize the use of North American steel in automobile production throughout North America."

　　Still, US domestic steel prices may come under further pressure should the US lift or change the tariff on imported steel imposed on Mexico and Canada as import offer volumes tick back up. Trump's announcement of tariffs on Canadian and Mexican steel in May surprised the market and was supportive of finished steel prices this summer, limiting supply from two of the US' largest foreign steel sources. US steel imports from Canada and Mexico combined fell by 11pc in June and July compared with a year earlier.

　　Mexico and Canada responded with reciprocal taxes on steel, aluminum and other goods.

　　KeyBanc expects quotas and/or stronger open trade agreements on steel to manifest once Canada joins the discussions.

　　The US is set to re-engage Canada in bilateral negotiations in a meeting today between Lighthizer and Canadian foreign minister Chrystia Freeland in Washington. The meeting comes amid strong support from Mexico and some in the US Congress for a renegotiated trilateral agreement among the three North American trading partners as originally intended. The US may also opt to scrap the existing Nafta agreement in favor of individual agreements with Canada and Mexico.

　　Trump yesterday proposed dumping the "Nafta" name in favor of the "more-elegant" United States-Mexico Trade Agreement, saying Nafta has a lot of "bad connotations" in the US.

　　Still, revisions to Nafta through a bilateral deal with Mexico will require congressional approval, and it remains unclear whether or not Trump will receive support for an agreement with Mexico without Canada.

　　"Let's not go there yet," Trump's trade adviser Peter Navarro said in a televised interview this morning.

　　"We're going to engage fully with Canada this week, and let's see what happens."