As of this writing, the Mexican automotive sector is experiencing a period of uncertain conditions due to the ongoing renegotiation of the NAFTA
As of the end of the past year, the three countries that are a party to the NAFTA have not come to an agreement on the form that the updated rules of origin will take. It is the hope of the three NAFTA countries that a determination of the new regime for the Mexican automotive sector, as well as in Canada and the United States will take place during the North American Free Trade Agreement renegotiation sessions that are scheduled to take place during the first quarter of 2018. In the upcoming fourth round of talks, the Trump administration will be seeking to raise the regional content in the automotive industry from 62.5% to 85%. He also is stipulating that fifty percent of that content be produced in the United States. One of the main purposes of seeking this change is a desire to reduce the United States’ commercial deficit with its Southern neighbor. Most of the imbalance in trade with Mexico is due to the fact that the United States imports more than it exports in the automotive industry to its NAFTA partner.
One of the main points of differences in the renegotiation of the North American Free Trade Agreement is the rules of origin for the Mexican automotive sector, as well as for the automotive sector in the United States and Canada. It is generally agreed upon that a modification or a change of the rules will not only cause changes in Mexico but will also influence the United States and Canada. More specifically an alteration of the rules for the automotive sector under the NAFTA may have a disruptive impact on the North America-wide supply chain that has formed over the two-plus decades that the NAFTA has been in effect.
In terms of the major products exported from the US to Mexico, transportation equipment (including motor vehicles) accounts for some fifteen percent of all shipments to that country. In addition to the Mexican automotive industry, the US exports a significant volume of electronics and computer products. Last year 5% percent of items shipped consisted of these products. Finally, shipment of crude oil to Mexico stood at 2.5%
The trade deficit of the United States with Mexico increased from thirty-four billion dollars to sixty-one billion dollars from 2012-2016. The commercial deficit that the United States has with Mexico is elevated when compared to that between itself and its northern neighbor. The United States’ deficit with Canada now stands at a much lower $10.9 billion.
What will happen to the Mexican automotive sector should the rules of origin be changed?
Some industry watchers, including Eduardo Solis who is the executive director of the Mexican Association of the Auto Industry (AMIA), is of the opinion that the North American Free Trade Agreement has been good for the Mexican passenger vehicle industry, as well as for the auto sectors in both Canada and the United States. He believes that a change in the NAFTA automotive rules of origin is not necessary. Other individuals such as Luis Aguirre of the National Council of the Maquiladora and Export Manufacturing Industry (INDEX) opine that higher costs in the price of vehicles to consumers sold in the NAFTA region will not only adversely affect buyers but also will not be a positive for the automakers. Experts believe that if there is a measurable alteration in the automotive rules of origin under a renegotiated North American Free Trade Agreement, adjustments should be put into place over a reasonable timeframe and not be altered from one day to the next. This is because a change to the current rules would weigh upon not only the end price of vehicles to the consumer but would also be something that would tangibly impact firms’ manufacturing processes and investment decisions. Due to Mexico’s pending presidential election season, NAFTA negotiators hope to resolve this issue by March. Should negotiations extend beyond the conclusion of the upcoming Mexican elections, the Mexican automotive sector, as well as those in the Canada and United States will experience an even longer period of uncertainty.
Those that track the automotive industry such as Gabriella Siller, director of Economic and Financial Analysis at Banco BASE, are of the opinion that an alteration in the rules of origin, or a potential departure of the United States from the North American Free Trade Agreement, will have a measurable effect on the three of the countries’ automotive industries. Taxes raised on car and auto part imports from the Mexican automotive sector to the United States and Canada will precipitate a restructuring and possible dislocation of the NAFTA region supply chains. Increased taxes on imports of Mexican product into the US will result in consumers paying more for automotive industry outputs.