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Home / Business / Trade agreement threatens Mexico's role as car hub

Trade agreement threatens Mexico's role as car hub



The Trump government's new trade agreement with Mexico will likely force some automakers to rethink their strategy for many models built in Mexico, threatening the country's role as a low-cost, limousine maker for the US

The Trade Agreement between the US and Mexico comes almost two decades after the founding of the North American Free Trade Agreement, which has led many automakers to relocate production of less lucrative models, especially small cars and compact sedans, to Mexico's low employment quotas. Under the new agreement, many of these models built in Mexico may not meet the more stringent requirements, potentially forcing them to receive a 2.5% tariff.

"Automakers will be faced with some tough choices," said

Kristin Dziczek,

an industry expert at the Center for Automotive Research in Ann Arbor, Michigan. Instead of making big changes to their production plans, automakers are more likely to pass on the 2.5% tariff to consumers or simply stop selling those lower-margin models in the US, she said. That could lead to rising prices or limit the choice of cars typically bought by price-conscious consumers, analysts said.

The trade agreement presented on Monday revises the existing Nafta rules and increases the minimum share of auto parts that must be manufactured in the North America to 75% from 62.5%. It also added a requirement that 40% to 45% of the content be made by workers earning at least $ 1

6 an hour, a move that could effectively force automakers to either increase wages in Mexico or add more content to them US and Canada are higher to avoid the 2.5% tariff.

Industry representatives are hopeful about some flexibility in calculating pay as the details of the new US-Mexico trade agreement become clearer.

Canada to come to the table. The Trade Pact needs the approval of Congress, and important legislators have signaled that they may refuse a White House attempt to send a bilateral agreement that excludes Canada.

The agreement spares many of the larger vehicles imported from Mexico, which have a high proportion of US-made content, including pick-ups from

General Motors
Co.

and

Fiat Chrysler automobiles

NV. But nearly a dozen models assembled in Mexico seem to conflict with the new rules, according to an analysis of the Wall Street Journal of National Highway Traffic Safety Administration data from 2018.

The Mexican government is counting on it About 32% vehicles manufactured in the country will not meet the new content rules to qualify for free trade.

NHTSA publishes an online database listing the share of parts from different countries for each vehicle on the market. Among the models manufactured in Mexico, which are unlikely to meet the new requirements, the Honda HR-V, Nissan Sentra and Ford Fusion are according to the government's content data. Also included are car models like the Beetle and the Golf, made by

Volkswagen
AG

in Mexico. Volkswagen builds 41% of its vehicles sold in the US in Mexico – more than twice as much as GM, the second-largest automaker that builds cars in Mexico for transport to the US

Volkswagen said in a statement that it was the US – Mexico acted "in principle", that a "very careful examination" should be carried out as soon as the details of the agreement become clearer. The repeated statements of

Nissan engine
Co.

.

Ford engine
Co.

and other automakers with vehicles that seem to drop content threshold.

The tougher content restrictions follow President Trump's commercial rhetoric that aspires automakers since winning the 2016 election. Both Ford and

Toyota engine
Corp.

Meanwhile, plans have changed in Mexico, Ford is canceling a planned small car plant and Toyota is scrapping plans to build the compact Corolla, reverse its investment and switch to truck production.

The US-Mexico trade agreement comes as Mexican exports are shipped to markets outside the US, and as American demand for traditional sedans has fallen in favor of larger vehicles such as sport utility vehicles.

Mexico's non-Nafta exports are expected to grow from 19% of its vehicle production in 2015 to 29% in 2023, according to estimates by the Center for Automotive Research

BMW
AG

It is expected that next year a factory will be opened in Mexico to build its 3 Series sedan to be sold on unspecified export markets.

The agreement could deter further direct investment by car companies in Mexico, said

Manuel Montoya,

Leader of the automotive cluster of Nuevo Leon, an industrial group representing suppliers in the industrial north of Mexico.

Mr. Montoya said that requiring 40% to 45% of the vehicle components to be made by workers earning at least $ 16 an hour would "force a large portion of production in Canada or the US, because in Mexico these kinds of jobs are easy do not work ". They do not exist. "

Asian and European car manufacturers with plants in Mexico are likely to have to adapt their supply chains to comply with the new rules, as these companies typically source parts from their home countries." Toyota, Nissan,

Mazda

Kia, BMW and others have assembly plants in Mexico.

Write to Chester Dawson at chester.dawson@wsj.com, Adrienne Roberts to Adrienne.Roberts@wsj.com, and Robbie Whelan to robbie.whelan@wsj.com


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