Negotiations were concluded in 2018 on the “New NAFTA” free-trade agreement—called the U.S.-Mexico-Canada Agreement (USMCA)—which could mark the end of a period of uncertainty regarding trade rules between member countries.

Mexico has now ratified the agreement, but the U.S. and Canada have yet to do so, and questions remain regarding the willingness among U.S. Democratic lawmakers to pass the measure as written.

While the political jockeying may continue, let’s assume the USMCA is adopted by all three parties in the coming months. What are the implications when it comes to corporate location strategy?  Evidence thus far does not indicate the USMCA will cause drastic shifts in where companies locate, but there are some noteworthy potential impacts for the automotive, food and digital sectors.

Automotive

The USMCA will require 75 percent North American value content for a vehicle to enjoy the benefits of lower tariffs within the bloc, up from 62.5 percent under NAFTA. This should encourage growth among automotive and auto parts suppliers in North America as companies attempt to increase local content in order to qualify for the lower tariffs.

The agreement’s labor content regulations for the automotive industry are among the most visible changes. Under the agreement, 40-45 percent of value content must be from labor earning at least $16 per hour.

The ultimate impact of the labor content requirements is a source of ongoing debate. Proponents focus on the prospect of improving the wages and quality of life of Mexican workers. Some believe the requirements will be beneficial for U.S. and Canadian workers, as the higher labor rates in Mexico will make U.S. and Canadian wages more competitive. Some predict the regulations will lead to higher production costs, driving increases in consumer prices and ultimately resulting in less demand, and fewer industry jobs.

Yet, there are several reasons to believe the regulations will have little to no impact on wages:

• Products that don’t meet the labor content regulations will be subject to a 2.5 percent tariff penalty, which may ultimately be an attractive alternative to raising wages.
• Automation may offer the ability to, at a minimum, reduce the number of jobs required to produce a given part.
• Enforcement of the provisions may prove problematic, which is a key source of the U.S. Democratic resistance. These lawmakers argue that, without stronger enforcement provisions, the wage requirements will be ignored.

One thing we do know is that the increased deployment of technology, software and electronics in automobiles will make it even harder for companies to meet the new labor content regulations. Vehicles are evolving into “internet-connected computers with wheels.” Currently much of the related inputs are sourced from China. The new USMCA provisions could drive increased investment in facilities to produce the components within North America, or they may simply prevent companies from qualifying for the USMCA favorable tariffs. Either scenario is likely to result in increased production costs.

While the local content regulations will present challenges for the automotive industry, industry leaders appear relieved to have the prospect of “no trade deal at all” off the table, at least for now. Further, side letters to the USMCA grant Mexico and Canada expanded safeguards in the event the U.S. levies a global tariff on vehicles in the name of national security, guaranteeing continued access to the U.S. market—a definite upside to having operations in North America.

Given the myriad of countervailing forces at work, it’s difficult to believe any one outcome will dominate and drive a sea-change in automotive supply chain locations, though it would seem the agreement could favor some degree of investment in North America (and the U.S. in particular). Certainly, at a company level, the new rules may trigger the need to make strategic adjustments.

Food

Within the food industry, the USMCA provides increased access for U.S. dairy farmers to the Canadian market – including the sale of milk, cheese and other products. The change could stimulate incremental growth for value chain operations in the U.S. or Canada, although increased market access does not necessarily equate to increased sales.

Digital

People, money and products aren’t the only items moving across borders. Data is on the move, too, and the rules and philosophies governing its movement are still evolving.

The USMCA takes a stance against “data localization” regulations – that is, requirements that data be housed in computing facilities within a member country’s borders. Additionally, the USMCA prohibits data transmission taxes.

These rules aren’t expected to trigger a mass migration in data centers or technology companies. For many businesses, however, the new rules mean greater flexibility to select the data storage strategy best suited for the business activity, allowing financial sector companies and others to more freely seek out lower cost solutions.

Impact on Other Industries

As mentioned above, we are not expecting most industries to experience dramatic shifts in location strategies in response to the USMCA. It is worth noting, however, that the automotive wage requirements could create some level of upward wage pressure in Mexico across a wider swath of industries, ultimately causing companies to shift current capacity, or future growth, to lower-cost markets outside North America, particularly if they are able to do so without incurring a heavy tariff penalty.  

Moving Forward: Plan B’s and the Need for Agility

While the ultimate outcome may still be uncertain, companies now have visibility to the anticipated provisions of the new framework, allowing for a meaningful and timely evaluation of whether location (or supply chain) adjustments could be required in response to the USMCA.  The answer(s) will be different for each company, driven by a combination of factors including where the company currently has facilities and the structure of its supply chain.

Complicating the process, however, will be the potential impacts of ongoing trade negotiations with other countries, the possibility the USMCA is not ratified, and the question mark regarding timing of ratification and implementation.

Despite the unknowns, companies can’t afford to wait for the dust to settle on these issues before acting, or at least developing actionable alternative strategies. Rather, the dynamic trade environment is demanding companies intentionally design agility and flexibility into their location strategies in order to continue moving forward. (More on this in a future blog post.)