When NAFTA went into effect on Jan 1, 1994, the world’s largest free trade area was officially formed. The ability to move products with ease across borders allowed supply chains to become more efficient and increasingly intertwined.
In 2015, NAFTA trade reached $1.1 trillion USD, of which 20% was auto related. From those $230 billion USD, 55% came from auto parts and 45% from vehicles. Because of the highly integrated nature of the automotive industry supply chain, it’s not uncommon for some parts and components to cross borders up to eight times before being assembled in one of the three NAFTA countries.
Automotive manufacturing Mexico has transformed in recent years due to new technologies and changes in consumer behaviors, as well as challenges that have arisen in trade and geopolitical situations. Now, after years of negotiations and uncertainty, a new agreement has been reached—the USMCA (as it’s known in the US), CUSMA (as it’s known in Canada), or T-MEC (as it’s known in Mexico).
So what does the USMCA mean for the automotive industry Mexico and in the North American trade block?
It establishes that vehicles assembled in the region be composed of 75% of regional content (an increase from 62.5 in NAFTA); of this percentage, 40% must come from employees earning at least $16 USD an hour; also, 70% of corporate purchases of steel and aluminum used by vehicle manufacturers are required to come from North America.
In April of 2019, the Mexican legislature showed its goodwill to comply with USMCA labor rules by adopting major labor reforms, including the establishment of a federal labor conciliation and registration center, as well as independent labor courts, and guidelines aimed at guaranteeing workers’ rights to participate in unions and to protect them against discrimination.
In addition to changes resulting from the USMCA, the global automotive industry has been moving towards more cost-effective production. One of the drivers for this is the increasing investment required for R&D to comply with the new global auto trends, including automation, self-driving cars and electrification.
North America’s economic success depends on strengthening our regional trade partnerships. In order to maintain a regional bloc that is able to compete with the Asian and European blocs, we must work together to leverage our competitive advantages. This includes the strength of the American OEM’s, the innovation and flexibility of Canadian auto part manufacturers, and Mexico’s growing pool of specialized labor. All of these factors will allow us to become even more self-sufficient, while other regions continue to struggle to be cost-competitive within their own supply chains.
With the enactment of the USMCA, the US, Mexico and Canada, will be well positioned to compete in the global market. However, there is still work to be done. By focusing on forming strategic partnerships that will allow us to take advantage of economies of scale we can leverage the advantages each country has to offer and gain market share globally, benefitting all three countries. Now is the time to take advantage of the USMCA and start up business in Mexico.
By Mariana Ceniceros | Business development | American Industries Group®
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