The new NAFTA, known as the U.S.-Mexico-Canada Agreement (USMCA), requires at least 40 percent of vehicles to be manufactured where workers earn at least $16 an hour in order for the vehicles to be tariff-free within the region. The condition was aimed at helping boost production in the U.S., where hourly wages are higher than in Mexico.
However, several carmakers, who had previously laid out their production bases according to the old NAFTA deal, are willing to raise labor costs or pay the tariffs to keep operations running in Mexico and ultimately avoid the cost of moving production.
Keihin, a Japanese car parts maker associated with Honda, is reportedly raising its hourly wages for factory workers in Mexico to the required $16 minimum this month, which is triple the average pay rate of a parts factory in Mexico.
Despite Keihin tripling labor costs, raising wages was reported to be cheaper than the cost of moving following the financial impact of the COVID-19 pandemic, Nikkei reported.
Japan’s Toyota, which built a new manufacturing plant in Mexico back in 2015, was also reported to be hesitant to move operations to the U.S. under the new agreement.
In February, the carmaker launched a full-scale production of pickup trucks, which would be subject to a 25 percent tariff if they do not meet the requirements of the USMCA. However, should Toyota cease to operate its newly built factory in Mexico, the company cannot recover its investment.
The U.S. government was previously told by Toyota that the carmaker would invest $13 billion in the U.S. over a five-year period starting 2017. But most of this pledge was made before Trump became president.
Japanese car parts maker Piolax is also planning to raise the hourly wage at its Mexican plant to $16 within this year to meet the USMCA requirements. The company is also installing robots to help curtail the increasing labor costs, Pilolax President Yukihiko Shimazu confirmed.
Around 13 to 14 percent of all cars sold in the U.S. are expected to be subject to tariffs, according to U.S. research agency the Center for Automotive Research. Consumers may foot the bill of these tariffs should carmakers pass on the cost to consumers by hiking car prices, which could rise by $470 to $2,200.
The center also estimated 70,000 to 360,000 jobs will be lost, leading to a $6 billion to $30.4 billion reduction in GDP, while 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.
Back in January, Trump noted that renegotiating NAFTA was “probably the number one reason that I decided to lead this crazy life that I’m leading right now,” while signing the USMCA.
“Today [January 29], we’re finally ending the NAFTA nightmare,” Trump said in a ceremony on the South Lawn of the White House.
“I keep my promises, and I’m fighting for the American worker,” Trump said.
Last year, the U.S. International Trade Commission estimated the USMCA would add 0.35 percent ($68 billion) to economic growth and generate 176,000 jobs over six years, which wouldn’t make a significant difference to a $22 trillion economy with 152 million non-farming jobs.
Earlier this year, many car manufacturers saw sales take a plunge following the novel coronavirus outbreak. Volkswagen and Toyota saw their U.S. sales drop in March by 42 percent and 35.3 percent, respectively. GM and Fiat Chrysler also saw U.S. sales fall in March by around 10 percent.
