US, Mexico agree to trade terms, new rules for auto imports

Departments - Regulations

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October 10, 2018

Though the deal was not formalized by the end of August, President Donald Trump’s administration and the Mexican government agreed to terms during North American Free Trade Agreement (NAFTA) re-negotiations that could slightly influence future U.S. automotive production. U.S. and Canadian negotiators were at an impasse on talks in late August, raising questions about the future trading relationship between the countries.

“They used to call it NAFTA. We’re going to call it the United States-Mexico Trade Agreement, and we’ll get rid of the name NAFTA,” Trump said. “It has a bad connotation because the United States was hurt very badly by NAFTA for many years. And now it’s a really good deal for both countries.”

The biggest changes are the amount of North American content needed to be considered a NAFTA-produced vehicle and the wages paid to workers producing that content.

Content – To avoid tariffs and fees, cars must get 75% of their content from the U.S., Mexico, or Canada, up from 62.5% mandated by current NAFTA rules. The increase would prevent automakers from buying lower-priced components from Asia, South America, or Europe and assembling them in Mexico to avoid tariffs. Bloomberg News estimates that only three cars built in Mexico that meet the 62.5% standard fail the 75% limit – the Nissan Versa, Audi SQ5, and Fiat 500. Of those, only the Nissan is a high-volume seller in the U.S.

Wages – 40% to 45% of vehicle components must be made by workers earning $16 per hour or more for a vehicle to qualify for free trade status. According to the Bureau of Labor Statistics, the average U.S. manufacturing wage for people making motor vehicles and motor vehicle components was $22.47 in July. In Mexico, major automakers pay about $8 per hour, and component suppliers pay as little as $4. The average Canadian manufacturing worker makes about $20 per hour. So, complying with the wage rules will mandate large amounts of content from the U.S., Canada, Europe, or high-wage countries in Asia such as Japan and Korea.

Statistics vary on how much of a vehicle’s value comes from high-wage vs. low-wage countries, but Bloomberg estimates that any vehicle with 55% or less of its content coming from Mexico would comply. About one-third of Mexican-produced cars would fail that test, but several vehicles such as the Ford Fusion and Fiesta cars are scheduled to end production before the new rules go into place. However, that number may drop as rules are finalized and the definitions of value percentages get defined – such as what portion of design and engineering costs incurred at offices in Detroit can be applied to components manufactured in Mexico. http://www.ustr.gov; http://www.whitehouse.gov