The new trade agreement between the United States, Canada and Mexico, called the United States-Mexico-Canada Agreement (USMCA) which came into effect on July 1, may not achieve its goal. A new report from Nikkei Asian Review says that automakers are not keen to move manufacturing operations from Mexico to the United States. Instead, companies either raise the wages of non-American workers or simply prepare to pay the tariffs.
Keihin, a Honda auto parts supplier in Mexico, will increase employees’ hourly wages to $ 16. The agreement between the three countries states that 40% or more of passenger vehicle parts must be made by workers earning at least $ 16 an hour if automakers are to trade freely in North America. Piolax, another auto parts maker, will also raise wages to $ 16 at its Mexican plant to meet the requirements of the trade agreement.
Toyota is also unlikely to shift vehicle production to the United States. In 2015, the Japanese automaker built a new factory in Mexico where it now produces the popular Tacoma pickup, which could face a 25% tariff in the United States if it does not comply with the 40% rule. from the USMC. An anonymous senior executive at Toyota told the publication that the company “did not want to be defeated by a policy of which we do not know how long it would last”.
The cost of offshoring is also an obstacle for companies. Nikkei Asian Review notes that the coronavirus pandemic has cut profits, making such a move financially risky, and Toyota must operate its Mexican plant to recoup its investment. Some companies are considering automation to compensate for higher wages.
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Ultimately, these higher production costs are passed on to the consumer, who, according to the Center of Automotive Research, could pay $ 470 to $ 2,200 more for a new car affected by USMCA tariffs. Sales could also fall by 1.3 million vehicles annually due to the agreement and other recent US trade policies. The USMCA replaces the old North American Free Trade Agreement (NAFTA) which came into force in 1994.