A revamped trade agreement involving the United States, Canada and Mexico entered into force on Wednesday, setting a higher bar for tariff-free access to the North American market that could affect Japanese and other foreign automakers operating in the region.
The United States-Mexico-Canada Agreement, or USMCA, is touted by U.S. President Donald Trump as a major victory in his drive to bring back manufacturing jobs to his country, which he believes shifted to Mexico and elsewhere as a result of the 26-year-old North American Free Trade Agreement.
To qualify for zero auto tariffs, the USMCA requires 75 percent of auto components to be made in North America, up from the current 62.5 percent.
It also stipulates that 40 to 45 percent of auto content be made by workers earning at least $16 per hour, a wage level that would reduce incentives for U.S. and foreign carmakers to move jobs to Mexico, a country with low-wage manufacturing labor.
Both changes are designed to encourage more auto production in the United States, reflecting Trump's "America First" mantra.
Major Japanese automakers such as Toyota Motor Corp., which have seen Mexico as a key production base for the NAFTA region, are likely to be compelled to rethink their procurement strategies.
Shifting production to the United States could push up costs by $2,000 per vehicle, Koji Endo, an analyst at SBI Securities Co. in Japan, has estimated, citing higher payrolls for hiring Americans including for logistic services.
"Whether it is the United States or Mexico, companies need to establish vehicle production systems under a long-term investment strategy" that will not be affected by the policies of each administration, Endo said.
The renegotiation of NAFTA began in 2017 at the request of Trump, with the three countries initially signing USMCA the following year. But they have agreed to add changes to improve enforcement of workers' rights and address other concerns, and an amended accord was signed late last year.
The USMCA also expands U.S. access in Canada for certain dairy, poultry, and egg products. It has also established strong provisions on intellectual property and digital trade, according to the office of the U.S. Trade Representative.
The Trump administration has also reached partial trade agreements with China and Japan, both of which entered into force this year.
