USMCA Influences Labor, Competitiveness of Mexican Industry
Home > Automotive > News Article

USMCA Influences Labor, Competitiveness of Mexican Industry

Photo by:   Mexico Business
Share it!
Fernando Mares By Fernando Mares | Journalist and Industry Analyst - Wed, 03/15/2023 - 12:52

The USMCA has significantly impacted Mexico’s automotive industry, keeping the sector competitive and ready for global changes. The treaty is transforming the automotive industry in Mexico, particularly in the areas of labor, rules of origin and environmental standards.

Rules of Origin and Nearshoring
One of the key changes in the USMCA was the requirement for a higher percentage of North American content in vehicles to qualify for duty-free treatment. Specifically, the USMCA requires that 75% of a vehicle's content be produced in North America (up from 62.5% under NAFTA). In addition, between 40% and 45% of a vehicle's content must be produced by workers earning at least US$16 per hour, a measure aimed at reducing the incentive to outsource production to lower-wage countries. “Providers must be more precise in the information they deliver to automakers since revision in customs will be stricter, this is one of the main challenges to automakers derived from the USMCA,” says Thomas Karig, Independent Automotive, Governance and Corporate Consultant. 

The supply of some raw materials, such as steel and aluminum, is another challenge brought by the USMCA. The treaty includes some requirements pertaining to steel and aluminum, which worry industry because Mexico is not a major producer of aluminum, while some steel producers might not comply with the industry’s minimum standards. 

To comply with USMCA requirements, automotive manufacturers had to increase their production of components and parts in North America. This has led to significant investments in Mexico by automakers and top-tier suppliers, particularly in the area of EV production.

"The availability of spare parts produced in Mexico provides a competitive advantage for the country by helping to comply with the rules of origin in its free trade agreements," says Fausto López, Director of International Treaties and Customs, Volkswagen. Moreover, the country needs to build up its capabilities to produce EVs and their components, particularly batteries. "The battery is the most expensive part of an EV, accounting for 30% of the car's value, and the battery cells represent 30% of the battery's value. To comply with European and North American rules of origin, we must begin manufacturing batteries in the region, and this needs to happen immediately," he adds.

Mexico has been exploring the possibility of producing batteries for EVs for the past few years and has worked hard in developing such capabilities, explains Karen Lellouche, Managing Director and Senior Partner, Boston Consulting Group (BCG). The country has promoted investment projects related to the production of EVs, targeting many steps of the value chain from lithium to spare parts. Clusters have also been working hard in developing and coordinating an ecosystem for the manufacture of EVs. “I think the next challenge for Mexico will be investing in R&D. Currently, Mexico is far from reaching that stage, but I think it is possible for it to invest in it,” adds Lellouche.

That USMCA will make Mexico more attractive to engineering efforts by strengthening its manufacturing practices, as many of its vehicles will be exported to the North American market. To improve their engineering areas, companies must collaborate with universities in Mexico, Asia and the EU to train better engineers for the automotive industry, as the sector needs workers who know of the technology and of Environmental, Social and Governance (ESG) standards, says Karig.  

The USMCA also includes environmental provisions aimed at reducing emissions and promoting sustainable practices in the automotive industry. These provisions require automakers to reduce emissions and promote the use of environmentally friendly technologies in the production of vehicles.

The treaty has helped the automotive sector to remain competitive in the region and successfully recover from the COVID-19 pandemic. “By the end of 2022 we achieved a production of auto parts of US$741 billion, which represents a 12.73% growth when compared with 2021,” says Elisa Crespo, President, the Automotive Regional Cluster of the State of Mexico (CLAUTEDOMEX). 

Mexico still plays an important role in the world’s automotive sector. Foreign companies are no longer questioning whether they should relocate to Mexico; they are questioning in which part of Mexico they should land, says Leolluche. 

The USMCA has also brought significant changes to Mexico’s labor environment. “We are working hard with companies to catch up with compliance regarding labor rights,” says López.

Since the enforcement of the USMCA, the hegemonic Mexican Worker Confederation (CTM) has started to lose power among automotive companies. CTM-affiliated unions have lost workers’ votes to independent counterparts at key plants, such as Nissan Aguascalientes and General Motors Silao. With the automotive sector leading the way, the entire Mexican industrial sector could experience a dramatic shift in worker representation, allowing workers to freely elect their representatives and actively participate in decision-making processes.

Under USMCA, Mexico agreed to implement labor reforms to improve working conditions, protect workers' rights and promote collective bargaining. In some cases, these reforms have led to higher wages, better working conditions and more stable labor relations in the Mexican automotive industry. 

USMCA also triggered several labor complaints from the US government against Mexico, as US authorities alleged that some companies in Mexico did not respect freedom of association and collective bargaining rights. To prevent any problems, automakers remain in close contact with suppliers to keep up with new labor regulations, fostering free association rights and collective contracts, while working on the prevention of discrimination and forced labor, says López.

Photo by:   Mexico Business

You May Like

Most popular