South of the border

US-Mexico trade accord challenges German carmakers

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Ay, caramba! Source: Reuters

German companies, especially carmakers, are not convinced that the new trade accord between the United States and Mexico safeguards the billions they have invested in North American production.

The new treaty’s requirements for local content and for wage thresholds poses difficulties, but above all the exclusion of Canada from the initial pact threatens to disrupt the supply chains companies have built up across the three countries.

“It would certainly impact German companies if the three-way pact between the US, Mexico and Canada breaks apart,” said Martin Wansleben, executive director of the German Chambers of Commerce DIHT. “Uncertainty is more prevalent here than relief.”

Linked supply chains

Volkswagen, Daimler and BMW, in particular, have invested heavily in production both for the North American market and for export. “The value-added chains in the three countries are closely intertwined,” said Bernhard Mattes, head of automobile industry association VDA.

The new treaty raises the amount of local content produced to 75 percent from 62.5 percent, for instance, to avoid tariffs on cars. This creates a problem for Daimler and BMW because the luxury carmakers don’t manufacture engines in North America and their local production falls somewhere between 60 and 70 percent. Industry sources speculate that getting carmakers to manufacture engines in the United States was one of the primary objectives of this production requirement.

Another provision of the treaty requires 40 to 45 percent of hours worked on a product to be paid at a minimum of $16 an hour. German carmakers have no problem with that level in their US factories, but the average wage in the Mexican plants is just $10 an hour. This also affects suppliers like Bosch and Continental.

Canada resisting “sunset clause”

The absence of Canada in the new accord is the biggest problem for German carmakers, however, because their supply chains extend there as well. It wasn’t the local content and wage thresholds that were problematic for the Canadian auto industry, said Flavio Volpe, head of Canada’s industry association, who called the terms “practicable.”

It was Ottawa fiercely resisting the introduction of a sunset clause into the NAFTA treaty. The US originally wanted the treaty to expire in five years, but that was softened to 16 years, with a review after six years. Now, Canadian Prime Minister Justin Trudeau is under tremendous pressure, both from business and the opposition party, to make concessions allowing Canada to join the treaty.

US President Donald Trump made it clear that either Canada joins the treaty or Canadian auto imports will face a punitive tariff of up to 25 percent. Not only the fate of the Canadian industry hangs in the balance, but also to a great extent that of German industrial production in the region.

The new provisions will certainly benefit US workers in bringing more production back to the country, said Christopher Richter, auto analyst at CLSA in Tokyo. Although it also hits Japanese producers hard, it doesn’t pull the rug out from under their business model, like it does Canada.

Several Handelsblatt reporters contributed to this article. It was adapted into English by Darrell Delamaide, a Handelsblatt Global editor in Washington, DC. To contact the author: d.delamaide@extern.handelsblatt.com.

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