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Bright future for production companies in Mexico

18 October 2019

Mexico is quickly becoming North America's #1 assembly hub. Even the new trade agreement – which was developed to improve the competitive position of the US's industrial sector – cannot curb this development. This article will explain exactly what is going on.

By means of the trade agreement between the United States, Canada and Mexico (USMCA), President Donald Trump wanted to motivate car manufacturers to move their assembly activities from “low-wage country” Mexico back to the US, the Financieel Dagblad writes. The agreement includes new regulations with regard to the origin of car parts. However, it just so happens that many car manufacturers are already in compliance with these rules and will, therefore continue to assemble their products in Mexico.

40/16 rule

The new agreement states that 40% of a vehicle must be manufactured by workers who earn at least $16 per hour. At the northern border of Mexico, the minimum wage is around $9. Nevertheless, many companies, including Ford and Chrysler, already comply with the new regulations, e.g. because research and development may also be counted as part of this 40% requirement. These companies conduct most of their R&D activities in the US and Canada, where wages are higher than $16 per hour.

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75% of the production in the trade zone

Furthermore, 75% of the car now has to be manufactured within the trade zone. That figure used to be 62.5%. On the one hand, this pushes North American car manufacturers to choose suppliers close to home: in Mexico. On the other hand, suppliers themselves opt to relocate their production activities to Mexico or to open a new production site there. The country's competitive wages and the easy access to the world's largest economy are decisive factors in their choice for Mexico. On top of that, many Mexican production sites are state of the art and can easily compete with the best that the US has to offer.

Conclusion

The new trade agreement will not immediately lead to any radical changes or more jobs in the United States’ industrial sector. In fact, Mexico is currently reaping the benefits of the new regulations. While the high-tech and specialised suppliers stay put in the US and Canada, the major assembly sites will still relocate to Mexico.

Are you ready to start producing in Mexico?

Contact us! ITB Group has production sites all over the world, including in Mexico. This allows us to produce on a local-for-local basis. We are happy to advise you about the most affordable production site for your business.