Others will pay the 25 percent tariff.
The new trade agreement between the US, Canada, and Mexico, called the United States-Mexico-Canada-Agreement (USMCA) that went into effect July 1, may not fulfill its intended purpose. According to Nikkei Asian Review, automakers aren’t keen to move manufacturing operations to the US. Companies are instead increasing wages or preparing to pay tariffs.
Keihin, a Honda parts supplier in Mexico will increase hourly wages to $16 an hr. To allow automakers to trade freely in North America, the agreement between the three nations requires that at least 40 percent of passenger car parts be made by workers earning at least $16 per hour. To meet the requirements of the trade agreement, Piolax, another maker of auto parts, will raise its wages to $16 in its Mexican plant.
Toyota will not move vehicle production to the US. The Japanese automaker, Toyota, built a new Mexican factory that produces the Tacoma pickup. If it fails to comply with the USMC’s 40 percent rule, it could be subject to a 25% tariff in the US. Unnamed Toyota executives told the publication that they don’t want to be “whipped around by a strategy that we don’t know how long will last.”
Companies face additional challenges due to the high cost of moving. Nikkei Asia Review points out that the coronavirus epidemic has lowered profits. Toyota must operate its Mexican plant to recoup its investment. To offset higher wages, some companies look to automation.
The higher production costs end up being passed on to consumers, who could pay between $470 and $2,200 more to purchase a new vehicle affected by USMCA tariffs. The agreement and recent US trade policies could cause sales to fall by as much as 1.3 million vehicles each year. The USMCA replaces 1994’s North American Free Trade Agreement (NAFTA).