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The USMCA's Impact on Mexico's Automotive Industry
Kind: ICD What's New  Organization: Department of International Cooperation  Publish Date: 2020-10-30 15:31
The USMCA's Impact on Mexico's Automotive Industry

The U.S-Mexico-Canada Agreement came into force on July 1, 2020. The accord is the result of renegotiation of the North American Free Trade Agreement by the member states over the past couple of years. NAFTA, inked in 1994, governs more than US$1.2 trillion worth of trade among the three nations.

The Mexican automotive industry is not only gaining recognition within the manufacturing realm but has also contributed generously to Mexico's economy.

According to International Organization of Motor Vehicle Manufacturers (OICA) data, in 2018 Mexico was the world's sixth largest vehicle producer and the fourth largest exporter.

For the year, Mexico's total exports of automobiles and auto parts accounted for 31.6% of the country's total export volume and 35.8% of manufacturing export volume. The sector employed more than 1.9 million people.

New Domestic Content Rules for Automobiles

Auto content rules were a major issue throughout the USMCA negotiations. The USMCA includes two significant changes to how cars will be made and when they can be declared as made in the United States.

First, the USMCA increases to 75% (from 62.5%) the percentage of a vehicle's parts that must be manufactured in North America. Although the 75% figure has garnered most of the attention, the USMCA (as did NAFTA) actually includes different rules: Part content is divided into core, principal, and complementary parts with content requirements of 75%, 65%, and 60%, respectively.

The content calculations will also be subject to the USMCA's rules of origin, which do away with NAFTA's tracing scheme as well as the concept of "deemed originating."

These changes will affect the automotive supply chain. For example, the USMCA introduces a new rule requiring that 70% of the total steel and aluminum used in an automobile must be sourced from North American suppliers.

Combined with the elimination of the tariff shift rules for stamped products, this will require supply chain changes for a number of auto producers.

While there are broader labor rules incorporated into the USMCA, the primary focus is on the agreement's new requirements that workers earning at least US$16 per hour make 40% to 45% of a vehicle's components.

Challenges and Opportunities

Mexico is expected to attract more foreign investment than the United States due to the domestic content rules and to be able to transform from an auto assembly hub to a valued-added one in the supply chain.

It is believed that the side effects of the new agreement will increase the cost of automobile production which make manufacturers expand production in the U.S. (in line with US$16 per hour wage) or Mexico (in line with the 75% domestic content rate), as well as reduce the supply chain ratios in the European and Asian regions.

Although the USMCA will help stabilize the investment environment in Mexico and attract foreign investment, the impact of the U.S.-China trade dispute may be higher than the change in the rules of regional content of automobiles. For example, U.S. President Donald Trump announced in late May 2019 that tariffs would be imposed on all products imported from Mexico from June 10 because of his dissatisfaction with the effectiveness of Mexico's handling of immigration issues. Although in the end the tariffs were not imposed because an agreement was reached between the United States and Mexico, foreign businesspeople will take the uncertainty factor in U.S.-Mexico bilateral relations into account, so Mexico will no longer be the only option for investors.

Moreover, the automotive industry in Mexico is undergoing a time of unprecedented change as a result of the COVID-19 pandemic, so it will be hard to really measure the USMCA’s true effects, whether positive or negative, in the short term and possibly even the midterm.




Sources:
Economic Division, Taipei Economic and Cultural Office in Mexico
https://www.lexology.com/
http://www.revistacomercioexterior.com/
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Update: 2020-04-23
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