An agreement that injects gasoline into the motor industry | Economy

An agreement that injects gasoline into the motor industry | Economy

January 3, 2017. The year could not have started worse for Mexico: Ford, one of the largest automobile companies in the world, announced the cancellation of an investment of 1,600 million dollars for the opening of a plant in the country and dragged the peso to a new historical low against the dollar. Donald Trump had not yet taken office as president of the United States, but his overtly protectionist and anti-Mexican speech had led the company to put aside its economic interests to please the Republican tycoon and to rethink his investments in a very profitable business model until then. : manufacture in Mexico and sell a few kilometers to the north, in the second largest car market in the world.

With the agreement, Mexico will be able to export 44% more than it produces without going through the cash

If Ford had known that, 20 months later, the Republican president was going to agree on the reissue of the North American Free Trade Agreement (TLC), perhaps I would have thought twice: after the agreement sealed at the last hour of September 30, the giants of the car are guaranteed that they can continue to take advantage of low Mexican wages and access facilities to the US market as long as they meet a new list of demands.

"It removes a very large part of uncertainty," says Juan Manuel Herrera, an economist at Canadian bank Scotiabank. An opinion shared by Jim O'Sullivan, an analyst at High Frequency Economics, for whom the pact was necessary to put an end to the doubts created by Trump. The non-agreement, an option that was on the table throughout the negotiation, would have triggered the costs, raised the prices in the concessionaires and made it unfeasible that some models could continue to be produced. The sigh of relief has been widespread in the corridors of the Mexican government and the assemblers. General Motors immediately applauded the good end of the talks and stressed that preserving the trilateral framework was "vital". "This agreement will support an integrated and globally competitive automotive business," said Jor Hinrichs, responsible for international operations at Ford.

The regional content of the car should be 75% compared to the previous 62.5%

For Mexico, in the same boat as the assemblers since day one of the negotiation, the new trade agreement is the best news possible on the economic plane: 80% of its sales abroad end in the US and the car industry is responsible of the third part of the total. In fact, the Latin American country has gone from panic to a potential global tariff of 25% for the importation of cars – with which Trump feared – to be able to see even favored by the measure: the new trade agreement ensures that it will be able to export up to 44% more than it produces today without having to go through cash, while the rest of automotive power would have to add an additional tax burden on their production.

But not everything is positive for the sector. The new trilateral agreement between the US, Mexico and Canada, renamed in English as USMCA, includes a number of provisions that will force the three big Detroit – Ford, General Motors and Fiat Chrysler – to Volkswagen – with its iconic plant Puebla (southern Mexico) – and the large Asian companies with presence in the country, such as Toyota, Honda, Kia or Nissan, to adapt to a new environment more demanding for several reasons. Firstly, because the regional content of each car – the percentage of parts with which it is manufactured – should be 75%, compared to 62.5% previously; a demand from Washington, which believes that this will increase the workload for its component industry, and that it will force companies such as Nissan, Honda or Volkswagen to adjust, which acquire more components from outside the region. Second, a new requirement that 40% of each car be manufactured in high-wage areas – more than $ 16 an hour, which de facto excludes Mexico. And third, that 70% of aluminum and steel is of North American origin.

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Three measures, recognized by the Japanese investment bank Nomura, "increase the pressure on their costs", which could be passed on to US consumers in the form of higher prices. The new text, adds Catherine Mann, an analyst at Citigroup, introduces "new regulatory layers" that can create inefficiencies. It is the currency that had to be paid to Trump by the Mexican and automobile authorities in exchange for the commercial agreement not being left on a piece of paper.

It will be more expensive for manufacturers to replace parts from other countries with those from the US

As Carla Hills, a member of the team that negotiated the 1994 agreement, points out, it is vital to analyze with great care how changes will affect the operations of the companies and, consequently, their results: the automobile trade between the three countries it depends on a hugely complex supply chain, which moves billions of dollars annually through factories located throughout the region.

Although it is still early to know in detail this increase in manufacturing costs or retail prices, there is one thing clear: "[A los fabricantes] It will end up leaving them a little more expensive to have to replace components purchased in other regions with others from the US or Canada, "says Herrera. However, they will have more than enough time to adapt: ​​the new thresholds will gradually increase during a five-year period and will not come into force until the middle of next year, when the ratification process of the agreement ends.

The signing of the first FTA, almost a quarter of a century ago, represented a major victory for the automobile sector in the US, which used it to direct the production of smaller cars to its southern neighbor. A movement that would detract the auxiliary industry. Now, despite Trump's protectionism, it does not seem that this scheme will change radically, the magnate's greatest aspiration when he opened the commercial melon.

Spain secures its 70 plants in the three countries

María Fernández

The Spanish industry takes a breath after agreement. Nafta had been key to advancing the national interests of the auxiliary industry in North America, and the current position of the suppliers made them play a lot with the new agreement. Gestamp, CIE, Antolín … suppliers currently have 70 production plants and R & D centers between Mexico (most) the United States and Canada. The employer Sernauto breathes: "We hope and wish that existing conditions are guaranteed and improved as much as possible. We understand that the ratification of this agreement reinforces the framework of commercial exchanges and, therefore, the possibility of increasing the turnover in these destinations, "says a spokesperson. Companies also see the glass half full. "Gestamp will adapt to the situation," they say from the company. "The clarity in the agreement is something positive, in our case we do not produce in Canada, but in the United States and Mexico, where we have eight and five factories respectively. The investments we make are long-term and conditioned by our customers. " Other sources in the component industry repeat the same arguments. "The reality is that productions in Mexico are not being affected," explains Jesús Fernández, director of promotion and innovation at Fagor Ederlan Group. In Antolin, they believe it is early for a valuation of the agreement, but remember that they have a turnover in the three countries of 1,738 million with 15 factories in the United States and a staff of 5,700 people and another nine in Mexico with 4,000 employees.


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