| 5:06 PM EST

Will USMCA Coax Jobs to U.S.? Maybe Not

Some companies are opting to hike wages in Mexico—or pay higher tariffs
#facilities #americas #Toyota

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One aim of the new North America trade pact is to lure jobs from Mexico to the U.S. It isn’t working out that way.

The U.S.-Mexico-Canada Agreement takes effect on July 1. One of its key features says vehicles built in those countries will move tariff-free in North America only if 40% of their content was produced by workers who are paid at least $16 per hour.

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That minimum is meant to coax carmakers in Mexico, where hourly wages average about $5, to buy more components from the U.S. and Canada, where the $16 minimum is no problem.

But that isn’t what is happening, at least among members of the Japan auto industry, according to The Nikkei. The Tokyo-based business newspaper says many companies have concluded that rearranging their supply chains—or relocating entire assembly plants to the U.S.— isn’t a viable option.

Plan B

Instead, they plan to multiply local wages or paying the 25% tariff for noncompliance.

You read that right: Those companies figure it’s more cost effective to triple the average pay in their Mexican plants than to move those facilities to the U.S.

Analysts pointed out this possibility years ago when the Trump administration launched negotiations to update the North American Free Trade Agreement. The Nikkei says that is exactly what is happening.

The newspaper cites Keihin and Piolax as companies that say they will raise the average pay in their Mexican plants to at least $16 by year-end. The latter company adds that it also is adding more robots to offset the resulting rise in labor costs.

Toyota’s Dilemma

The USMCA leaves Toyota in a similar quandary. It cranked up Tacoma pickup truck production at its new Tacoma pickup truck plant in Guanajuato, Mexico, only a few months ago

Quickly reconfiguring the factory’s supply chain enough to achieve the 40% content goal isn’t feasible. Nor is mothballing a brand new facility and building another one in the U.S. an option.

At least for the short term, The Nikkei indicates, Toyota must weigh hefty pay raises or import taxes on its trucks.

Bottom Line

Either option for any producer in Mexico means higher vehicle costs, and soon. It isn’t clear how much of these costs will reach the consumer. Even less apparent is how supply chains will shift over the longer term.

But for now, the auto industry can at celebrate at least one victory: clarity after four years of negotiations about what the post-NAFTA trade rules are.

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