The automotive industry prepares for the USMCA

Tuesday, November 5, 2019

Among the changes that will bring the Free Trade Agreement between Mexico, the United States and Canada, will be the modification of the rule of Regional Content Value of the automotive sector, which will go from 62.5 to 75%, this change will be given in 4 states with gradual increases in the percentage over a period of three years.

Although the trade pact is still pending approval, the automotive industry is already preparing to face these changes, so they have already announced investments to increase regional production capacity. An example of this is Volkswagen de Mexico, which confirmed its investment plan for $2.5 billion dollars until 2020 in the country, also reported that due to USMCA, will increase its suppliers in Puebla to produce the new SUV in the coming year.

It is worth noting in 2018, Mexico closed with an automotive trade surplus of $83 billion dollars, a figure that was considered as historic, so the Mexican Association of the Automotive Industry (AMIA for its Spanish acronym), expects this year to exceed 90 billion, maintaining this upward trend in the coming years, once the USMCA is ratified, as this will boost the automotive sector, due to the increase in regional content.

AMIA President Eduardo Solis stressed that the automotive industry captures foreign exchange twice as much as remittances and five times as much as petroleum products, in addition to four times more than the balance of tourism, which means that it is the engine of Mexican exports.

Other companies that are preparing, is the automotive BMW, which evaluates what will be the strategy for the development of engines at the plant in San Luis Potosi, which will allow it to meet the new regional content of origin.

In the case of the companies, General Motors, Ford, Fiat Chrysler and Tesla, comply on average with the requirement of 75% of the Value of Regional Content (VCR) to market cars with the tariff advantages of the USMCA.

However, according to information from the American Automobile Labeling Act, Asian companies Mazda, Honda, Nissan, Toyota, KIA and Subaru currently operate with an average of 59% of VCR, while Audi, Mercedes Benz, Volkswagen and BMW, have an average of 51%.

In this regard, the President of the National Auto Parts Industry, Oscar Albin, indicated that the USMCA contains more complicated automotive rules of origin of all free trade agreements in the world.

It is worth mentioning that the VCR is the percentage that indicates the extent to which a good has been produced in the local region of the producer. Some factors that influence this percentage are the components or materials of the merchandise, its location, among others.

For 25 years the automotive industry has worked with the rule of complying with 62.5% VCR, but if the USMCA is approved, there will be four rules: the first is that the regional content will reach up to 75%; 70% of the steel and aluminum will have to be from the region; 40% of the cost of the vehicle will have to come from a place of manufacture of 16 dollars per hour and seven main components of the car have to be manufactured in the region.

Source: AMIA