Start of USMCA and Mexican automobile industry trends

NAFTA revision aims to return manufacturing to U.S., but Mexico as export base continues to advance

2020/07/17

Summary

  The revised NAFTA (North American Free Trade Agreement), which has been under negotiation and consideration among the three countries of the United States, Mexico, and Canada for nearly the past three years, was agreed to and ratified by the parliaments of the three countries. As a result, the revised NAFTA agreement became effective as the USMCA (United States-Mexico-Canada Agreement) on July 1, 2020.

  The USMCA retains many of the NAFTA standards that went into effect in 1992, with some new and elevated requirements added, such as a higher North American regional value content requirement, as well as provisions aimed at returning vehicle manufacturing to the U.S.

  By 2023, the USMCA mandates stricter rules of origin for automotive industry producers, requiring at least 75% of passenger vehicle and light truck components to be manufactured in a USMCA country without being subjected to tariffs. The additional labor value content rule requires that 40-45% of vehicle components must be produced in areas by workers earning higher salaries of at least USD 16 per hour.

  To date, automotive-related companies have maximized the merits of NAFTA and expanded their investments in Mexico to serve as an export base to the U.S. In recent years, new investments in Mexican factories aimed at satisfying U.S. consumer demand and the renewal of OEM production model portfolios have shown further progress in the face of the uncertainties associated with the NAFTA negotiations. The newly enacted USMCA, in general, has been received favorably by industry-related companies because it dispels some of the uncertainties that would hinder their future plans. But, going forward, companies will need to accept the anticipated cost increases or avoid tariffs, and some companies will be forced to consider and determine whether to revise their production system and supply chain in North America.

  This report summarizes the contents and background of the USMCA, and highlights recent events centering on the Mexican automobile industry, which is expected to experience the greatest impact from the agreement.

 

Related reports:
OEM Measures to Expand Sales of SUVs and Pickups in the U.S. (May 2020)
COVID-19 Plant-impact update - North America (Apr. 2020)
Toyota: Expanding sales of light trucks and hybrids in the U.S. (Apr. 2020)
GM: Electrification, SUV portfolio enhancement, and autonomous driving (Mar. 2020)
FCA and PSA’s Merger (Part 2): Expanding CASE-related investment (Feb. 2020)
Ford’s Corporate Transformation (Part 1): Partnership with VW on CVs, AV and EVs (Sep. 2019)
Mexico shifting production of compact cars to SUVs/pickups to meet the US demand (Apr. 2019)
United States-Mexico-Canada Agreement updates NAFTA (Oct. 2018)