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Automotive MarketTrends | February 2019, Issue 1

NAFTA/Mexico Update

The global automotive industry is experiencing one of the most significant trade shifts in over two decades. In this first issue, we focus on new developments in conducting business in Mexico, including international trade and product safety.

In fall 2018, the United States, Canada, and Mexico reached an agreement to revise the 25-year-old North American Free Trade Agreement (NAFTA). The new agreement, now named the United States-Mexico-Canada Agreement (USMCA), is not expected to take effect until 2020(at the earliest) as it needs to make its way through the legislative process in each country.

As it stands now, USMCA is expected to have a profound impact on the automotive industry, particularly due to a much stricter Rule of Origin – which says that 75 percent of a car or truck’s components must be manufactured in North America, an appreciable uptick from the current 62.5 percent under NAFTA.

Rule of Origin: As per the former Mexican Minister of Economy, Ildefonso Guajardo Villarreal, 70 percent of current production in Mexico already complies with the USMCA. It is expected that due to the USMCA requirements, Mexico will receive greater investments as a result of production transferring from China, Korea, Japan, and other countries. Regardless of their placement in the North American automotive industry food chain, in the short term, all players need to evaluate how the USMCA will impact their current activities, possibly as early as 2020, and take concrete actions based on same; in the medium term, companies operating in the NAFTA/USMCA region need to be on the lookout for USMCA´s intended “renegotiation” by the now Democrat-controlled U.S. Congress; and, in the long term, manufacturers should expect that Mexico’s export orientation and openness will remain unmodified.

Ultimately, the USMCA will require the supplier-to-OEM relationship to be much stronger and closer than in the original NAFTA. Companies that understand and prepare for the new requirements in advance will find that they have a strategic advantage over companies that are not proactive in preparing for the new marketplace rules.

Market Intelligence

Cost Impact of USMCA: In a survey of 100 U.S.-based auto executives conducted by Propeller Insights on behalf of LevaData in December 2018, 63 percent of automotive executives believed that production costs would increase due to USMCA. Although survey respondents seemed to believe there would be cost issues in the short term, 78 percent of automotive executives felt that the changes required by USMCA would have a positive impact on their company in the long term. Fifty-three percent of those surveyed felt USMCA would ultimately increase North American vehicle manufacturing and provide a net improvement for workers and consumers.

The survey also found that auto executives are very aware they will need to find ways to save money in the supply chain to decrease costs: 36 percent plan to renegotiate part supply deals to pass costs on to suppliers and 35 percent will look for cost savings in the production process. This comes because the proposed USMCA document requires automakers to manufacture 40 percent of their motor vehicles in facilities where assembly workers earn at least $16 an hour. Though this is largely not a problem for U.S. and Canadian production facilities, where workers already make more than that on average, it is problematic for Mexico, where workers often make less, though up to 15 percent can be credited through expenditures in technology and assembly of specific parts (engine, transmission and advanced batteries). Making matters trickier, many U.S. automakers recently moved some of their production to Mexico for that very reason – the work was cheaper than in the United States or Canada.

New Leadership in Mexico: NAFTA and USMCA updates are not the only developments those in the auto industry should be thinking about when it comes to trade with Mexico. Former Mexico City Mayor Andrés Manuel López Obrador began his six-year term as president of Mexico in December 2018. U.S. and other foreign companies operating in the country should be aware of changes his presidency might bring. If the United States withdraws from NAFTA, we think that Mexico will strengthen its internal export promotion programs so that the “near-shore” advantage, and manufacturing experience in complex (i.e., aerospace and motor vehicles) chains of production, is not lost. In particular, we expect continued strong support for low tariffs on the Mexican side and continued support for their export-oriented programs (commonly referred to as maquiladora), which give advantages to U.S. companies that operate near the U.S.-Mexico border and bring in goods from the United States for further processing in their facilities.

Recent Legal Developments

Revisions to Product Safety Regulations in Mexico: Mexico has revamped its product safety regulatory framework to bring aspects into conformance with the United States. Compliance with product safety requirements in Mexico used to be relatively relaxed, but is now more stringent. For example, it is now necessary to notify the Mexican regulatory agency when a company identifies a risk.

Along with recent changes to product safety and corruption risks, a few years ago class actions were permitted in Mexico and are becoming more relevant in this new environment. Companies should also be aware of the mandatory recall requirements enforced by the Mexican consumer protection agency (PROFECO) and should get their compliance programs up to speed. In what was once a voluntary process, PROFECO can remove or require repair for defective products, open investigations regarding product safety concerns, and impose relevant sanctions on manufacturing companies in Mexico that are not complying with product safety standards or that could otherwise harm the life, safety, or health of consumers.

© 2019 Foley & Lardner LLP

TRENDING LEGAL ANALYSIS


About this Author

Mark A. Aiello, Foley Lardner, Supply Chain matters Lawyer, Warranty Litigation Attorney
Partner

Mark A. Aiello is a partner with Foley & Lardner LLP where he focuses on business transactions and commercial litigation, including business transfer, supply chain and warranty litigation, product development and protection, as well as advising on business governance matters. His experience ranges from representing large businesses in complex matters to counseling small, closely held businesses concerning a wide range of commercial issues. Mr. Aiello is co-chair of the firm’s Automotive Industry Team.

Mr. Aiello has successfully completed a...

313.234.7126
Marcos Carrasco Menchaca International Trade Attorney
Partner

Marcos Carrasco-Menchaca provides advisory and consulting services related to international trade compliance, customs, free trade agreements, customs litigation and taxation on foreign trade, as well as rendering services in international business transactions and administrative litigation.

Marcos has broad experience in advising the implementation of governmental exportation programs, such as the registration of companies in the Mexican Maquila Program (IMMEX), VAT certification, Sectorial Promotion Programs (PROSEC) and Drawback, among others.

A recognized international trade lawyer, Marcos is currently an advisor on foreign trade of major multinational and national companies in the retail, fashion, oil and gas, automotive, auto parts and manufacturing industries.

Because of his background dealing with international contracting and cross border litigation, companies and fellow attorneys constantly seek for his advice on a broad picture of business-related implications and consequences.

Marcos also has relevant knowledge in customs valuation and has assisted global brand name companies determining whether or not the payments of royalties, insurance and freight fees must be considered as incrementing the customs value of imported goods.

Professional Affiliations

  • Arbitrator, Mexico City’s Chamber of Commerce (CANACO) (2002-present)

  • Professor, Universidad Panamericana (UP) (1999-2002)

  • Professor, Universidad Anahuac del Sur (2001)

  • Professor, Universidad Iberoamericana (UIA) (2002)

  • Professor, Centro Universitario Mexico Division of Higher Studies (1999-2001)

Honors & Awards

  • Recognized, The Legal 500 Latin America

    • International Trade and Customs (2017)

Education

  • J.D., Universidad Panamericana (2000)

Languages

  • Spanish

52 55 5284 8546
Alejandro Nemo Gomez Strozzi, Foley Lardner Law Firm, Mexico, Corporate Law Attorney
Partner

Alejandro Gómez-Strozzi focuses his practice on providing advisory and consulting services related to international trade compliance, antidumping, customs, foreign trade and Mexican administrative law.

As a top international trade lawyer, he has advised major multinational companies in the automotive, steel and consumer products sectors. He provides advice regarding available foreign trade programs, tax implications of foreign trade operations, implementation of free trade agreements entered into by Mexico, customs procedures, trade compliance...

5255-5284-8561
Gregory Husisian, Foley Lardner, International Export regulation lawyer, Automotive industry Attorney
Partner

Gregory Husisian is a partner and litigation attorney with Foley & Lardner LLP. Mr. Husisian is chair of the firm’s Export Controls and National Security Practice, focusing on international regulatory issues posed by Office of Foreign Assets Control (OFAC) economic sanctions, International Traffic in Arms Regulations (ITAR), Export Administration Regulations (EAR), and Nuclear Regulatory Commission export controls, the Foreign Corrupt Practices Act (FCPA), and the antiboycott regulations. He also represents companies with national security concerns in acquisitions...

202-945-6149
Marco Antonio Najera Martinez, Foley Lardner, Litigation lawyer
Partner

Marco Najera Martinez is a recognized go-to transactional and regulatory lawyer representing global companies doing business in Mexico. With particular experience in the Mexico antitrust laws, he represents Fortune 500 corporations, as well as Mexico companies, in this highly specialized area. Marco’s clients comprise many sectors, including financial services, insurance, energy, health care and real estate, and they rely on him for mergers and acquisitions, as well as a full range of corporate, project financing, compliance and regulatory matters.

Marco has a deep understanding of...

52 55 5284 8545