Uncategorized

Mexico, Canada would share in USMCA windfall

John Irwin, Automotive News Canada
December 16, 2019

President Donald Trump reopened North American trade talks with the aim of bringing factory jobs back to the U.S. from Mexico.

But the new United States-Mexico-Canada Agreement, which passed in the U.S. House of Representatives last week, is likely to shift auto parts investment from Asia to all three countries. And Mexican and Canadian suppliers could become big beneficiaries.

Oscar Albin, president of Mexico’s auto parts association, last week said that about $10 billion (all figures in USD) in additional annual production will likely come from the billions of investment dollars now sitting on the sidelines in Mexico, waiting for approval of the revised accord. Chinese investment alone could reach $2 billion as parts production moves to Mexico to take advantage of the trade deal, and to skirt the U.S. crackdown on Chinese-made goods, the association said.

Flavio Volpe, the head of Canada’s auto parts association, forecasts that his country’s auto suppliers will see an additional $8 billion in annual orders once USMCA is in full effect.

Volpe predicted that Asia would be the manufacturing base most negatively impacted by the new rules as suppliers shift investment to North America to meet USMCA’s new requirements for local content levels.

“The USMCA is the best trade agreement ever signed for the Canadian auto supply sector,” Volpe said.

USMCA has support in Mexico and Canada but has been held up in Congress this year. But on Dec. 10, the Democrat-controlled House signed off on the deal. The plan must now be approved by the Republican-controlled Senate.

Among USMCA’s changes is a requirement that 75 per cent of a vehicle’s components be made in one of the three North American countries to cross borders tariff free, up from 62.5 per cent under NAFTA.

“When we talk about production in the auto industry, we’re talking about regions, not countries,” said an executive from a North American automaker who asked not to be identified. “This agreement is an affirmation that we can still approach North America as a cohesive region.”

One new challenge for North American auto companies could be making sure they are compliant with the pact’s complex new rules.

Producers must account for a labour content value rule that requires at least 40 per cent of a passenger car to be made by hourly workers making at least $16 per hour, in addition to new classifications for auto parts.

“There are 25,000 to 30,000 parts in a car,” the automaker executive said. “We’re going to have to certify where they all come from. The Tier 1 companies can probably do that. But when you get into Tier 2 and Tier 3? They just don’t have the trade compliance personnel to do all that.”

But the penalties for importing without bothering to meet the higher content requirements aren’t that high, said Brian Collie, senior partner and managing director at Boston Consulting Group. For most vehicles and auto parts, the penalty for noncompliance is a 2.5 percent tariff, raising the possibility that automakers could elect to absorb tariff costs on some noncompliant vehicles.

“I have a hard time seeing that 2.5 percent cost of noncompliance alone being enough for people to make massive changes to their footprint,” Collie said.

The U.S. is likely to see new manufacturing investment under USMCA, many in the industry agreed last week. But Randy Miller, EY’s global advanced manufacturing and mobility leader, cautioned that U.S. manufacturers still have unused capacity available.

“Capacity utilization is still an issue,” Miller said. “So we gotta use it up.”

Laurence Iliff, Lindsay Chappell and Jamie Butters contributed to this report.

Click here for original article.

Leave a Reply

Your email address will not be published. Required fields are marked *