The United States and Canada reached an agreement on Sunday to update the 1994 North American Free Trade Agreement after Washington had forged a separate trade deal with Mexico in August.
The updated deal effectively maintains the auto industry’s current footprint in North America, and spares Canada and Mexico from the prospect of U.S. national security tariffs on their vehicles.
Mazda Motor Corp (7261.T), which ships cars to the United States from Mexico and Japan, called the deal a “big step forward”. Nissan Motor Corp (7201.T), which makes the cars it sells in the United States locally as well as in Mexico, Japan and other countries, said it was “encouraged” by the agreement.
Toyota Motor Corp (7203.T), Japan’s biggest automaker, said it was “pleased” that a basic deal was reached. Other automakers were not immediately available for comment.
While the deal has removed the risk that the disintegration of the pact would have posed to automakers, bigger risks loom large for Japanese firms as a chunk of the roughly 7 million cars they sold in the U.S. last year were shipped from Japan, and a trade deal between Washington and Tokyo has yet to be agreed.
The United States and Japan last week agreed to begin fresh trade talks, with U.S. President Donald Trump seeking to address Japan’s $69 billion trade surplus, of which nearly two-thirds comes from auto exports.
Washington is also investigating the possibility of slapping 25 percent tariffs on auto imports on national security grounds, although it has agreed with Japan to put any new tariffs on hold during the talks.
Analysts say the United States may take a tougher stance on auto imports from Japan than from its neighbors.
“If Japan requests an exemption from the 25 percent tariffs under consideration, Washington could propose a more strict cap on imports than it agreed to with Mexico and Canada,” said Koji Endo, senior analyst at SBI Securities.
“That would be a risk.”
This could be a big blow to Japan, as the United States is a key source of revenue for Japanese automakers including Toyota, Nissan and Honda Motor Co (7267.T).
The U.S. market accounts for a quarter or more of their annual global vehicle sales, and of their total U.S. sales, and depending on the automaker, as much as half of those was shipped from Japan last year.
A side letter to the United States-Mexico-Canada Agreement (USMCA), as the new deal agreed on Sunday is called, states that Mexico and Canada would each get a tariff-free passenger vehicle quota of 2.6 million annual export units, well above their current export levels.
“I don’t think that will happen in the case of Japan,” said Takeshi Miyao, managing director of consultancy Carnorama, adding that U.S. automakers, which sell very few cars in Japan, would stand to lose little from any trade barriers with Japan.
Reporting by Naomi Tajitsu; Editing by Miyoung Kim and Muralikumar Anantharaman