Last week, the Trump administration concluded a preliminary agreement with Mexico, which will replace the North American Free Trade Agreement (NAFTA). In recent weeks, automakers and suppliers were alarmed by the Trump administration’s demands for trade concessions from Mexico.
Such concessions could have raised manufacturing costs by billions of dollars, they feared. But now, they are likely to be largely relieved. Though details of the deal are still awaited, industry watchers think most companies will be able to comply with the conditions that have been revealed so far.
Of course, critics of the agreement think that the agreement could harm the auto industry in the long term. The new deal could raise costs and significantly lower competitiveness. This is why it is important to examine the contours of the deal and evaluate its implications for the auto industry.
Details Revealed So Far
According to details revealed so far, in order for an automobile to avoid U.S. import duties, a minimum of 75% of its value would have to be produced in North America. This is significantly higher than the 62.5% stipulated by NAFTA, described by Trump as the “worst trade deal ever made.”
Additionally, automakers would have to utilize a higher proportion of local steel, aluminum, and associated parts. Also, 40-45% of vehicles would have to be produced by workers, who are being paid a minimum of $16 an hour. This is clearly an attempt to protect and create jobs in Canada and United States, which have a significant wage differential with Mexico.
Such conditions should create pressure on automakers to purchase a higher proportion of parts from the United States and Canada. This would moderately boost employment at auto parts suppliers such as Delphi Technologies DLPH and Johnson Controls International JCI.
Automakers Should Easily Meet Conditions
Immediately after President Trump announced his preliminary agreement with Mexico, shares of Ford F, General Motors GM and Fiat Chrysler FCAU gained marginally. This was because automakers were worried that Trump would exit NAFTA without concluding a replacement deal. This would hurt companies whose supply chains extend across Canadian, Mexican and U.S. borders.
Industry watchers and analysts think the majority of auto companies should be able to fulfill the conditions of the agreement disclosed up to now. Several of the changes proposed by the deal, such as hiring more U.S. workers, are already underway. In fact, the auto industry has been hiring more workers in the United States for several years now.
U.S. Auto Jobs Are Increasing
According to figures from the Bureau of Labor Statistics, jobs at U.S. car and auto parts companies increased year-over-year by 40,000 in July to hit 972,000. Since 2009, when Chrysler and General Motors were the recipients of government bailouts, manufacturers have added 300,000 jobs.
It is true that Mexico has witnessed the construction of six auto plants in the last decade. But the United States has also seen several new auto plants come up. Volvo is setting up a new plant in South Carolina which will employ 4,000 workers by 2021.
Mazda MZDAY and Toyota TM have recently agreed to jointly set up a factory in Alabama. Mazda has a Zack Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here.
The freshly concluded deal does have its share of critics. They believe that the requirement to use a higher proportion of parts made in North America and a side deal to cap duty-free imports from Mexico could raise costs for auto companies.
However, overall the auto industry is relieved that a replacement deal has been concluded. They also think that they are in a good position to comply with most of its conditions revealed up to now. In any case, automakers are steadily increasing U.S. jobs, which is one of the cornerstones of the new agreement.
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