Last Updated on May 23, 2024
The intricacies of international trade agreements highlight the significant impact of the United States-Mexico-Canada Agreement (USMCA) on Mexico's industrial manufacturing sector. The USMCA, which replaced the North American Free Trade Agreement (NAFTA) in 2020, has ushered in the era of trade relations between the three nations, with Mexico's industrial manufacturing sector at the forefront of this change. The agreement's provisions have created a new landscape for trade, investment, and economic growth. Mexico's industrial manufacturing sector is poised to play a critical role in this new era.
Source: National Association of Manufacturers. NAM Releases USMCA State Data Sheets
USMCA
According to Investopedia, USMCA is “…a trade deal between the three nations which was signed on November 30, 2018. The USMCA replaced the North American Free Trade Agreement (NAFTA), which had been in effect since January of 1994. Under the terms of NAFTA, tariffs on many goods passing between North America’s three major economic powers were gradually phased out.”
There are many reasons why USMCA is significant, but the most important reason is the ability to save money for US businesses. Tariffs have been reduced between the nations; investments have been encouraged in North American industrial buildings, and international markets have been opened. The USMCA provides duty-free treatment for goods that qualify under its rules of origin, which avoid two percent tariffs.
The USMCA has also significantly strengthened U.S. supply chains. COVID-19 and increasing competition with China have highlighted the vulnerability of relying on Chinese supply chains. According to the Brookings Institute:
“The significance of USMCA is clear. Canada and Mexico are the United States’ largest export markets: 23 percent of U.S. exports go to Canada and Mexico (versus 5 percent to China), over 70 percent of Mexican exports are sent to the U.S. and Canada, and 62 percent of Canadian exports are to the U.S. and Mexico. Trade among the countries provides key inputs into regional supply chains’ value added (40 percent U.S. value add versus 5 percent China). “
USMCA's Key Provisions: A Game-Changer for Mexico's Industrial Manufacturing
The USMCA introduced several key provisions that have significantly impacted Mexico's industrial manufacturing sector. These include:
- Increased Regional Value Content (RVC) requirements: A minimum of 75% of a product's content must be manufactured within the USMCA region to qualify for tariff-free treatment.
- Stricter labor and environmental standards: Mexico must adhere to higher labor and environmental standards, potentially increasing production costs.
- New rules of origin: Products must meet specific requirements to be considered USMCA-sourced.
A minimum of 75% of a product's content must be manufactured within the USMCA region to qualify for tariff-free treatment.
Industrial Manufacturing in Mexico: Opportunities and Challenges
Manufacturing in Mexico has been impacted both positively and negatively by the USMCA:
- Increased investment: The USMCA has attracted new investment to Mexico, particularly in the automotive and aerospace sectors.
- Diversification of trade: Mexico has diversified its trade relationships, reducing its dependence on the US market.
- Increased costs: Compliance with strict labor and environmental standards have increased production costs for some Mexican manufacturers.
- Supply chain disruptions: The USMCA's revised rules of origin and RVC requirements have made some companies re-evaluate their supply chains and increased administrative requirements.
The USMCA has the strongest and most far-reaching labor provisions of any trade agreement. The agreement contains a labor chapter that prioritizes labor obligations by including them in the core of the agreement and making them fully enforceable. This is a major change from NAFTA, which only contained a side agreement on labor, and it will dramatically benefit American workers and businesses.
US Department of Labor
To Thrive in This New Landscape, Mexican Manufacturers Must Adapt and Innovate
Strategies for success include:
- Diversifying supply chains: Reducing dependence on single suppliers and exploring new markets.
- Investing in technology: Implementing automation and digital solutions to increase efficiency and reduce costs.
- Developing competitive advantages: Focusing on high-value products and services to differentiate themselves in the market.
Much of the public discussion of supply chain reorientation suggests that when U.S. enterprises reduce or eliminate dependence on China for their materials and components, the United States should be substituted for production processes that can be highly automated and/or are subject to severe national security concerns. However, products, as well as parts and components that remain labor intensive, should logically be produced in Mexico, where average hourly manufacturing labor costs are still only about 15%-20% of those in the United States.
Baker Institute
Conclusion: Identifying Effective Strategies to Implement the USMCA's Provisions
The USMCA has significantly impacted Mexico's industrial manufacturing sector, presenting both opportunities and challenges. As the sector continues to evolve, it's crucial for businesses to adapt and innovate to remain competitive. By understanding the USMCA's provisions and implementing effective strategies, Mexican manufacturers can thrive in this new era of trade.
Mexico Industrial Manufacturing Processes Powered by Novalink
Many manufacturing processes can be applied across various industries, and manufacturing companies can use them to tailor production business needs. Here are some examples of manufacturing processes NovaLink uses for its clients in Mexico.
Repetitive Manufacturing
Repeated production processing comprised of dedicated production lines that produce the same or similar items, all year round, usually committed to a known production rate. Minimal setup, little changeover. Operation speed adjustable to customer demand.
Process Manufacturing (Batch)
Allows the use of the “same” production resources for different products. This method of production is capable of creating several items at the same time in a series of production steps. It is important to define minimum order quantity to maintain certain level of efficiency. Once a batch is completed, the equipment, workcell or production line can be entirely switched over to produce the next batch when needed. Batch processing needs to be continued to be efficient.
Discrete Manufacturing
Assembly or production line where the processing steps may be diverse with a large variation of setups and changeover frequencies. Miscellaneous production items or discordant in design. Seasonal production may require altering line setup and usually changeovers require more time. All line layouts adjustments and utilities relocation are made in house, no third party support required.
Job Shop Manufacturing
Defined production areas (cells) rather than production or assembly lines. Production processes focused on smaller batches/bundles of custom products, can be either made-to-order (MTO) or made-to-stock (MTS). Work Cells usually organized to make a version of the product or performing most of the processing steps altogether. A portion of the process may be performed by automated equipment and selected labor operations executed by multifunctional working cells.
Process Manufacturing (Continuous)
Continuous manufacturing is referred to the production process where the materials are always in a state of motion or constant change. Allows things to be produced efficiently at scale, usually referred as mass production. Food processing or energy production are common examples.
FAQs: The Impact of USMCA on Mexico's Industrial Manufacturing Sector
1. What is the main goal of the USMCA in relation to Mexico's Industrial Manufacturing Sector?
The main goal of the USMCA is to promote free and fair trade among the three nations, while also protecting labor and environmental standards, and increasing investment in Mexico's industrial manufacturing sector.
2. How has the USMCA affected Mexico's automotive industry within the industrial manufacturing sector?
The USMCA has attracted new investment to Mexico's automotive industry, but has also increased costs due to stricter labor and environmental standards.
3. What is the impact of the USMCA's Regional Value Content (RVC) requirement on Mexico's industrial manufacturing sector?
The RVC requirement has increased the demand for domestic production, potentially leading to increased investment and job creation in Mexico's industrial manufacturing sector.
4. How can Mexican manufacturers in the industrial manufacturing sector adapt to the USMCA's new rules of origin?
Mexican manufacturers can adapt by diversifying their supply chains, investing in technology, and developing competitive advantages to remain competitive.
5. What is the long-term impact of the USMCA on Mexico's industrial manufacturing sector?
The long-term impact of the USMCA on Mexico's industrial manufacturing sector is expected to be positive, attracting new investment, promoting trade, and increasing economic growth, but its full impact is still being assessed.
About NovaLink
As a manufacturer in Mexico, NovaLink employs a unique approach that transcends the traditional model of shelter production. More than just the location of your manufacturing, we would like to become a partner in your manufacturing in Mexico. You will be able to relocate or initiate manufacturing for your company in Mexico in a low-cost labor environment with very little delay or up-front costs. Find out how we can help you by handling the manufacturing process.
There are NovaLink facilities in the border cities of Brownsville, Texas, Matamoros, Mexico, and Saltillo, Mexico.