The new North American free-trade agreement that went into effect on Wednesday, July 1st, was touted by U.S. President Donald Trump as an engine of American job creation. But Japan’s automakers are largely opting instead to keep operations in place and pay Mexican workers more or even just pay tariffs.
The US-Mexico-Canada Agreement requires 40% or more of parts for each passenger vehicle be manufactured by workers who are paid at least $16 per hour as a condition to make them tariff free in the region. Trump hailed that feature as a way to boost production in the U.S., which has a higher hourly rate than Mexico.
However, this looks to be wishful thinking. The ratio of US-Canada parts among Mexican-assembled vehicles sold in the U.S. was 13.5% in 2018, according to the U.S. Department of Transportation Highway Traffic Safety Administration. Trump’s theory was that U.S. production would inevitably increase to meet the 40% requirement, but Japanese automakers, which had already positioned their production bases according to the old NAFTA regime, are not simply willing to pull up stakes and redeploy.
One reason is the cost of moving production. Honda Motor-affiliated parts maker Keihin will raise the hourly wage of employees at a factory in Mexico to $16 by next month — triple the average rate of a parts factory in Mexico, but still cheaper than making a move. Because the pandemic has hurt earnings, the cost of the moving production will likely be too burdensome over the foreseeable future.
Auto component maker Piolax, will also raise the hourly wage at its Mexican plant to $16 within the year. The company is also installing robots to mitigate rising labor costs, President Yukihiko Shimazu said.
Toyota Motor, which built a new plant in Mexico in 2015, is not finding it easy to change plans either. The new plant started full-scale production of pickup trucks in February. The trucks are popular in the U.S. and would be subject to a 25% tariff if they do not meet the content requirements of the USMCA. But if Toyota does not operate the factory, it cannot recover its investment.
“We don’t want to be whipped around by a policy that we don’t know how long it will last,” said an executive at a Japanese automaker.
Toyota has told the U.S. government that it will invest $13 billion in America over a five-year period beginning in 2017, but most of this commitment was made before Trump became president.
Consumers will ultimately pay the price for inefficient production and increased component flow. U.S. research agency Center for Automotive Research estimates that 13% to 24% of all cars sold in the U.S. will be subject to tariffs. If automakers pass these costs on, prices will rise by $470 to $2,200.
The center also said U.S. car sales will drop by up to 1.3 million units annually due to the Trump administration’s trade policy — including sanctions on China. It estimates that 70,000 to 360,000 jobs will be lost, leading to a $6 billion to $30.4 billion reduction in gross domestic product.
The pandemic is also dragging down demand, setting up a tough road ahead for the auto industry.
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