NAFTA replacement USMCA could make Mexico-built cars more expensive

October 1, 2018

An 11th-hour agreement Sunday night between the U.S. and Canada sealed a new trade deal between the three primary North American economies that could increase the cost of building cars in Mexico.

The new deal—the United States-Mexico-Canada-Agreement—replaces the Clinton-era NAFTA. While much of the new USMCA trade deal is focused on exchanging consumable goods such as dairy and meat products, the automotive sector saw many changes. 

The leaders of all three countries said they plan to sign the deal by the end of November before it will be submitted to Congress for approval

MORE: US, foreign automakers spar over Trump's NAFTA rework

Over the next five years, the regional value content of a vehicle—the amount of locally sourced parts that determine its place of origin—will increase from 62.5 to 75 percent. All three countries were in agreement that they wanted more vehicle components built in North America rather than in Asia or Europe.

That may seem like a boon for Mexico, but about 40 percent of the vehicle's overall value will by 2023 need to be derived from so-called "high wage" areas that pay $16 an hour or more. Average wages for automotive component assembly in Mexico is under $4 an hour, according to the Center for Automotive Research. It's unlikely that will quadruple over the next four years.

Nearly every major automaker builds cars in Mexico, including some European luxury brands. The country's manufacturing economy benefitted significantly when the original NAFTA was signed in 1993. 

The deal could prompt automakers to build more cars in low-wage countries, but tariffs currently imposed on cars built in China would make that a tough proposition. That problem may exist in both directions since cars built the USMCA zone may be more costly to export from the U.S. than to build locally overseas. 

President Donald Trump retained the so-called "Section 232" national security tariffs that he has used to impose tariffs on cars built in Asia and Europe. Canada and Mexico were granted wide exemptions to what the CBC calls Trump's "sledgehammer." 

Mexico is exempt as long as its manufacturing growth doesn't exceed U.S. production, while Canada's applies to far more cars than the country produces. Canada exports more parts than completed vehicles to the U.S., although Fiat Chrysler Automobiles, Ford, General Motors, Honda, and Toyota have large vehicle assembly plants in Ontario.  

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