By Sharay Angulo
MEXICO CITY (Reuters) – Mexican auto parts manufacturers with clients across North America expect a record year after U.S. approval of a trade deal mandating higher regional inputs, but the new rules pose a bigger challenge to carmakers.
After months of wrangling, U.S. lawmakers on Thursday ratified the United States-Mexico-Canada Agreement (USMCA), brokered at the behest of President Donald Trump to replace the 1994 North American Free Trade Agreement (NAFTA).
The accord, which Canada’s parliament is expected to approve soon, requires automakers to use more local inputs for their cars to qualify for tariff-free trade within North America.
Over a period of years, automakers must gradually raise local content to 75% of a car’s value from 62.5%. During the transition to more regional parts production, carmakers face the challenge of reorganizing supply lines.
Auto parts industry association INA pointed to news that three Chinese automakers were considering a move to Mexico as evidence of the lift USMCA should give.
“It’s really important, because this will help to boost the numbers in terms of autoparts output,” Alberto Bustamante, INA’s foreign trade chief, told Reuters.
Mexico’s economy has been on the brink of recession for the past year. Car sales, output and exports have all fallen and the industry expects them to drop again this year.
By contrast, the autoparts industry, including Mexico-based Rassini (MX:) and Nemak (MX:) and a wealth of foreign suppliers such as Goodyear (O:) and Pirelli (MI:), grew by 2.2% last year.
INA expects sales in 2020 to surpass $100 billion for the first time, rising to $102 billion from nearly $99 billion.
USMCA was designed to slow the car industry’s exodus from the United States and Canada by requiring 40% of a light vehicle and 45% of a pickup to come from “high wage” areas paying workers at least $16 an hour.
Another challenge for manufacturers: rules requiring use of North American steel and aluminum.
“It’s going to be hard work with our suppliers to meet the new rules, especially the steel and aluminum requirements and the labor content value,” said Miguel Elizalde, head of the Mexican association of heavy vehicle makers, ANPACT.
Manufacturers in Mexico are confident they can take advantage of the 55-60% of the market they are not priced out of.
Still, Kenneth Smith, Mexico’s lead trade negotiator from 2017-2018, said the new terms in the USMCA would be onerous for the industry across North America.
“It’s not good for Mexico, for the United States or Canada, because at the end of the day, specialized steels are going to become more expensive for the auto sector,” he told Reuters.
But after nearly three years of fraught discussions, Mexico could take comfort from the fact that the United States finally signed off the deal.
“It’s very good news,” Smith said. “And it does give added certainty to investors and exporters.”