Others are prepared to 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. A new report from Nikkei Asian Review says automakers aren’t eager to shift manufacturing operations from Mexico to the US. Instead, companies are increasing wages for non-US workers or simply preparing to pay the tariffs.
Keihin, a Honda auto parts supplier in Mexico, will raise hourly employee wages to $16 an hour. The agreement between the three countries stipulates that 40 percent or more of passenger vehicle parts be manufactured by workers making at least $16 an hour if automakers want to trade in North America freely. Piolax, another auto parts maker, will also raise wages to $16 at its Mexican plant to fulfill the trade agreement’s requirements.
Toyota is also unlikely to move vehicle production back to the US. In 2015, the Japanese automaker built a new factory in Mexico where it now produces the popular Tacoma pickup, which could face a 25 percent tariff in the US if it fails to meet the USMC’s 40-percent rule. An unnamed Toyota executive told the publication that the company doesn’t “want to be whipped around by a policy that we don’t know how long it will last.”
Gallery: 2020 Toyota Tacoma: First Drive
The cost of relocating is also a hurdle for companies. Nikkei Asian Review notes the coronavirus pandemic has suppressed profits, making such a move financially risky, and Toyota needs to operate its Mexican factory to recoup its investment. Some companies are looking at automation to offset the higher wages.
Ultimately, those higher production costs are passed along to the consumer, who, according to the Center of Automotive Research, could pay $470 to $2,200 more for a new car affected by the USMCA tariffs. Sales could also fall by 1.3 million vehicles annually due to the agreement and other recent US trade policies. The USMCA replaces the old North American Free Trade Agreement (NAFTA) that took effect in 1994.