Last weekend, the governments of the United States, Canada and Mexico came to agreement on a new trade deal to replace the North American Free Trade Agreement. Known as the United States-Mexico-Canada-Agreement (or USMCA), the deal sees most changes coming to cars, labor standards, digital trade and intellectual property. Let’s focus on the portions of the agreement that would affect automotive manufacturers.
- 75 percent of an automobile’s components must have been manufactured in North America in order to avoid tariffs. This is an minimum requirement increase of roughly 13 percent under NAFTA. Already, foreign automotive manufacturers are considering increasing their North American manufacturing presence to qualify for these USMCA stipulations.
- Between 40 – 45 percent of every vehicle must be assembled by a worker earning no less than $16/hour. Countries found to be violating this labor provision can have sanctions brought against them. Analysts see this as a push to prevent companies from using certain regions to save on labor costs.
- Canada and Mexico received a special exemption from steel and aluminum tariffs as they pertain to these metals being used in vehicle production. The overall metal tariffs still apply, however.
These revised terms will cause large changes to each of the agreement’s nations. Mexico, for example, heavily focuses on importing parts, assembling vehicles and then shipping them to the United States and Canada. Under this new agreement, we are likely to see a spike in Mexico-based manufacturing rather than imports of parts. Other companies, such as Fiat Chrysler and its operations in Detroit, rely on foreign transmission imports to complete their vehicles. Expect to see more United States-based manufacturing from Fiat Chrysler if the USMCA passes.
It should be noted that the terms of USMCA have been negotiated by all three countries, but it has not yet been approved. All three governments need to ratify the agreement before it can officially take hold. If the agreement is approved, these terms would be phased in over a 2 – 5 year period as manufacturers adjust processes to abide by new regulations. Industry analysts see the biggest changes coming in engine and transmission production first, as those two components comprise approximately 30 percent of a car’s value.