USMCA and the Automobile Parts Industry

USMCA and the Automobile Parts Industry

In a recent study of census data, WorldCity reported trade between the U.S. and Mexico totaled $615 billion during 2019, and $612 billion between the U.S. and Canada.  Two-way trade between Canada and Mexico totaled $44 billion in 2019. 

For the period January to April, Mexico ranked No. 1 in total trade value with the U.S. at $176.13 billion. Mexico had exports of $72.81 billion and imports $103.33 billion in imports.  Canada ranked No. 2, with a total trade value of $173.84 billion.  Canada had exports of $84.01 billion and imports of $89.83 billion

This trend is expected to grow as Canada, Mexico, and the U.S. recently enacted USMCA.  The USMCA significantly rewrites the rules for trade in agriculture, manufacturing and services amongst Canada, Mexico, and the U.S.

The USMCA will directly benefit the automotive industry as one of the key components is a requirement 75% of a vehicle’s components are to be made in Canada, Mexico, and the U.S., to receive tariff free access to the three countries.  Another significant rule change is requiring that 40-45% of an automobile’s content must be made by workers earning at least $16 per hour.

USMCA is having a direct influence on discussions automobile parts manufacturers are having regarding nearshoring operations back to North America.  As mentioned in our article titled, “Repositioning of Auto Parts Operations from China to Mexico,” there are many reasons to nearshore the manufacturing from China.  Many companies point to being closer to their customer base, reduce tariff liabilities and security requirements.  It is not surprising to see Canadian, American, and other foreign companies look to take advantage of operating in Mexico and benefitting from the USMCA.

The Mexican benefactors to the repositioning of auto parts operations includes those regions along the U.S.- Mexico border, such as Tamaulipas, Nuevo Leon, Coahuila, Chihuahua, Baja California Norte.  These regions are home to hundreds of maquiladoras owned by U.S., foreign, and Mexican companies.  Maquiladoras provide jobs to thousands of workers and vital supplies to automobile assemblers.  On the U.S. side of the border, Texas, New Mexico, Arizona. and California benefit from increased maquiladora activity as these states are closely tied to Mexico and its economy.

In normal times, Mexican, Canadian, and American companies could expect a huge boost in business activity from the positive impact of the USMCA.   The COVID-19 pandemic is a major disruptor to business operations in all industries.  However, the combination of the pandemic and the USMCA may greatly enhance the prospect of more automobile part manufacturers looking to nearshore back to the North America.  Mexico, through the maquiladora program is open for business!