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Mexico’s dispute with the US regarding the USMCA rules of origin is moving forward through the treaty’s own mechanisms. The automotive industry is crucial for the country; therefore, the Ministry of Economy considers it a priority, said Luz María de la Mora, Deputy Minister of International Trade.
“USMCA is both an opportunity and a challenge for our country. The treaty allows Mexico to strengthen its presence in the North American supply chain and attract foreign direct investment (FDI) to comply with the rules of origin. Thus, Mexico is a global platform. The Ministry of Economy is aware of this and we prioritize the auto sector as a driver of growth for our economy,” said de la Mora at the International Mexican Automotive Industry Congress (CIIAM), an event organized by INA in collaboration with Mexico Business.
The auto sector represents 3.5 percent of the national GDP and 18.9 percent of the national manufacturing GDP, attracting 15 percent of the total FDI (US$2.82 billion), according to INEGI. According to de la Mora, between 1999 and 2020, US companies invested US$38.5 billion in the Mexican auto sector, Japanese companies invested US$15.1 billion and German companies invested US$14 billion, making them the most important partners of Mexico in this sector. It is also a crucial industry regarding employment, with over 1 million active jobs across the country in 2021. During the first three quarters of the year, auto exports amounted to US$102.69 billion, making up 28.6 percent of the country’s total exports, according to INEGI.
Although the auto sector remains crucial for Mexico, it has been hit hard by the pandemic, supply chain disruptions and the semiconductors shortage, explained de la Mora. “Light-vehicle production has been harmed by the pandemic and shortages. During international working meetings, we have all agreed that the best economic policy is (COVID-19) vaccination.”
Light vehicle sales in Mexico had their worst September since 2011 (when they amounted to 73,998 units) and hit the lowest level for any month since July 2020, following the 76,930 units sold during the month, as reported by MBN. The situation was not different in October, when the sales decreased by 7,771 vehicles against last year’s October. This represented the fourth contraction in sales of 2021.
The road to recovery for the industry is closely related to the strengthening of the supply chain during 2022, according to IHS Markit, but also to the resolution of the USMCA rules of origin dispute, on which the Ministry of Economy is working closely, said de la Mora. According to the new USMCA rules, “auto parts are classified in core parts, principal parts and complementary parts and are subject to different Regional Value Content (RVC) requirements.”
The disagreement on the interpretation of USMCA’s rules of origin has Mexico and Canada arguing about whether a core part should be considered as a 100-percent original part when calculating a vehicle’s RVC requested by the treaty if it complies with 75 percent of the RVC. The US asks for a “much more stringent interpretation,” says de la Mora, which would calculate the vehicle’s RVC averaging out each core part’s exact RVC. “Core parts should be considered original considering the agreed flexibilities.”
In short, USMCA in comparison to NAFTA, raised RVC requirements from 62.5 percent to 75 percent and abolished the tracing list, which made RVC calculating “stricter,” according to de la Mora. The new treaty also divided parts into categories and created the Labor Value Content rule, which requires OEMs to certify that a minimum 40 percent of the value of their vehicles is produced by workers who earn US$16 an hour or more. New steel and aluminum requirements were also defined: “Seven years after the enforcement of USMCA, for steel to be considered original, all steelmaking processes must occur in member party territories, including initial casting, mixing and coating,” said de la Mora. The entire intention of the treaty is to “create a commercial region where third-party countries seek to come and invest in the zone.”
Ministry of Economy’s Working Meetings
The Ministry of Economy has had several meetings with its counterparts in 2021. In March and July, Mexican authorities gathered with USDOC Gina Raimondo and USTR Katherine Tai. In September, Mexico and the US reactivated high-level economic dialogue, when the US Vice President visited Mexico to discuss the supply chain. Finally, on Nov. 5, 2021, Minister of Economy Tatiana Clouthier and Jean-François-Phillipe Champagne, Minister of Innovation, Science and Industry of Canada, gathered to discuss the integration of the auto sector under the USMCA rules of origin.
The semiconductors crisis has been a central issue during the working meetings, said de la Mora. Earlier this year, the US announced an aggressive bill to establish investments and incentives to support local semiconductor manufacturing, research and development, aiming to warranty supply chain security, as reported by MBN. The bill promoted a US$75 billion investment in the US. While matching this kind of incentives and investments is impossible in Mexico, the country is capable of contributing across the supply chain, said de la Mora.
“During the working meetings, we addressed the semiconductors issue. Mexico has to contribute in this regard. We have to define our supplying potential; the country is strong in testing and assembly of semiconductors,” she said.
Mexico and Canada are still in talks with the US to reach a satisfying solution for all involved parties to “give certainty and a clear legal framework” to the auto sector regarding RVC, explained de la Mora. However, North America is not the only market for the country. The Ministry of Economy is working closely with its counterparts in Argentina, Brazil, Ecuador, Singapore, Australia, New Zealand, South Korea and the UK to continue growing Mexico’s vast commercial-treaties network, which features 12 free trade agreements with 46 countries.