Auto parts production in Mexico is currently ranked at fifth in the world. Because of the new rules of origin regional content requirements included in the United States-Mexico-Canada trade agreement, Mexico will become even more attractive to foreign investors.
One of the most debated issues in the negotiation of the United States-Mexico-Canada Treaty was that related to the rules of origin in the automotive industry, that is, the percentage of components that must be manufactured in the region for a vehicle to be free of tariffs. A requirement of a higher percentage of components under the USMCA would likely induce more auto parts production in Mexico.
Prior to the renegotiation of the NAFTA, it was stipulated that to be considered originating, 62.5% of the value of an automobile would have to be the result of auto parts production in Mexico, the US, or Canada. Although the Trump administration sought a regional content requirement of 85%, it was agreed that the figure would be between 65% and 75%. Given current North American supply chain conditions, it may be a challenge for some automakers to meet this requirement.
The North American region as a whole and Mexico, in particular, is a global leader in the production of auto parts. During the last three years, the United States, Mexico, and Canada have all been among the top 10 vehicle component producers in the world. While the US has been the second largest producer over this period, auto parts manufacturing in Mexico has stood in the fifth position. Canada has rounded out North American participation in this market in eighth place. As a region, North America produced $US 400 billion dollars in automotive components in 2017. With a production of US $600 billion, China is the only country that outpaced the combined production of the US, Mexico, and Canada.
Currently, the new USMCA trade treaty will represent an opportunity to increase auto parts production in Mexico. Mexico has an advantage over its regional partners in terms of wages, and also an edge due to the fact that several parts of the vehicle manufacturing process already take place in the country.
Some Parts of an Automobile Must Be Made in North America
The new trade agreement dictates that there are seven essential parts that must originate in North America for a vehicle to achieve duty-free status. These parts are the:
- Chassis and Body;
- Directional System;
- Advanced Batteries.
Currently, there are suppliers for some of these components that are being imported from places such as Europe and Asia. The new trade deal stipulates that these items must be consumed from auto parts production in Mexico, or from suppliers in the United States and Canada. This circumstance has a present effect on the manufacture of engines and transmissions. The lack of local infrastructure to manufacture these components opens up the possibility that some manufacturers from Europe and Asia will invest in producing these items in Mexico, or in the US and Canada. If foreign investment directed at the production of engines and transmissions does not occur, vehicle assemblers that depend upon the import of these items will be at a disadvantage.
Industry watchers believe that an increase in regional content of approximately ten percent will cause auto parts manufacturing in Mexico to increase by a similar proportion over the next three years. This is relevant because from 2000 to 2017, Mexico received just over 36 million dollars of foreign investment in this sector.