18 sep 18

Why NAFTA matters for the Mexican car market

By September 30 the months of renegotiating NAFTA between the US, Mexico and Canada must reach an end; but where are we now, and what are the consequences for the car industry?

Renegotiating NAFTA

For months now, the US and Mexico are renegotiating the North American Free Trade Agreement (NAFTA), which so far resulted in a bilateral preliminary agreement. 

With regards to the automotive industry, Washington wanted to implement new standards in order to reduce the US-Mexican trade deficit, as a result of Mexican’s lower wages; and create more American jobs. Nevertheless, experts do not see the latter is going to happen any soon. 

America First

To be qualified for tariff-free trade, vehicles will have to be assembled with 75% components coming from within the trade bloc, up from the current level of 62.5%. Additionally, 40% of the car’s final assemble must be produced in areas where the wage is about $16 an hour, or above; for trucks it would even be 45%. Additionally, more local materials, such as steel and aluminium will have to be used. 

Nevertheless, Mexican negotiators could obtain an exemption for vehicles not meeting the new rule-of-origine percentages, and wage requirements. The vehicles assembled in existing plants will be subject to a 2.5% tariff; the ones of new factories will be subject to higher tariffs. 

Currently, 30% of the cars exported to the US do not meet the new requirements, according to the Mexican government; with the Honda HR-V, the Volkswagen Jetta and Golf, the Nissan Sentra, and the Ford Fiesta and Fusion among others. 

Increasing Prices

The new NAFTA might result in rising car prices, smaller profit margins, or both. Which might eventually result in putting on hold the export of specific models to the US; similar to Ford’s announcement to cancel plans to import a Focus crossover from China, as a consequence of Trump’s consideration to impose tariffs on an additional $200 billion imports. Further on, increasing prices, might decrease sales and eventually results in both economic and job losses. 

Deadline: September 30

The text of the deal should be ready by September 30, before Mexican President Enrique Peña Nieto leaves office, so legal hurdles can be taken before Mexico's new president, Andrés Manuel López Obrador takes office on December 1st. 

Until then, Canada has time as well to be included in the deal, with its own concerns and criteria. Nevertheless, President Trump already declared that he would give up the trilateral NAFTA for an exclusive Mexican-US treaty if Canada would not join the deal, which will have another negative impact on the automotive industry, among other industries. 

The new rules are expected to be put in place as from 2020, with a gradual transition period until 2023.

Authored by: Fien Van den steen