Key Automotive Brands Struggle with T-MEC Compliance
Since April, when the U.S. began imposing tariffs on vehicles that fail to meet or weakly comply with the T-MEC (Trade Agreement between Mexico, United States, and Canada) rules of origin, brands like BMW, Mercedes Benz, Honda, Mazda, and Audi have experienced a decline in exports.
Background on T-MEC and its Impact
The T-MEC sets commercial criteria to determine a product’s country of origin. It defines whether a product meets regional content or production processes established in the trade agreement to access preferential tariffs or benefits in international trade.
For exporting light vehicles from Mexico to the U.S., companies have faced two significant changes: stricter rules of origin in the T-MEC, which took effect in July 2020, and an increase from 2.5% to 25% in tariff payments for not complying with T-MEC rules since April 3.
Export Performance of New Auto Plants
- Mazda: With its sole Mexican plant operational since 2014, Mazda has seen a 36.0% interannual decline in exports to 29,375 units over the past four months.
- BMW Group: Since starting operations in San Luis Potosí in 2019, BMW Group has reported an 18.2% decrease in exports to 29,678 vehicles during the same period.
- Audi: Operating in San José Chiapa since 2016, Audi’s exports fell by 22.4%, resulting in 55,189 units.
- Mercedes Benz and Honda: Both brands, with new plants in Aguascalientes (2018) and Celaya (2014), respectively, have also experienced negative export trends. Mercedes Benz saw a -15.4% drop to 20,166 units, while Honda’s exports decreased by -8.7% to 70,400 units.
Established vs. New Plants: A Comparative Analysis
Long-standing auto manufacturing plants, such as Ford Motor Company’s century-long presence in Mexico, have built robust regional supply chains that enable compliance with T-MEC rules. In contrast, newer plants in Mexico struggle due to insufficient time to establish similar supply chains.
T-MEC Rules of Origin and Content Requirements
The T-MEC raised the Regional Value Content (RVC) for automobiles from 62.5% to 75%, with a distinct methodology. Additionally, it set a Labor Value Content (LVC) at 40%. This implies that nearly half of the vehicle’s value must be produced with wages of at least $16 per hour.
To meet these rules, up to 10% credits are allowed for research, development, and information technologies. Additional credits of 5% are granted for manufacturing engines, transmissions, or batteries.
The agreement mandates that 70% of steel and aluminum be North American, while essential auto parts (engines, chassis, transmissions, axles, suspensions, steering, and batteries) must meet an average RVC of 75%.
Key Questions and Answers
- What are the T-MEC rules of origin? The T-MEC rules of origin determine a product’s country of origin based on regional content or established production processes. Compliance grants preferential tariffs and trade benefits.
- Why are new auto plants in Mexico struggling with T-MEC compliance? Newer plants lack the time to develop robust regional supply chains, unlike established manufacturers like Ford Motor Company.
- What changes have been implemented in T-MEC tariffs? Tariffs on light vehicle imports to the U.S. increased from 2.5% to 25% for non-compliant vehicles since April 3, 2021.
- How do T-MEC content requirements affect auto manufacturers? The agreement mandates a 75% RVC for automobiles, with essential parts requiring an average of 75% RVC. LVC is set at 40%, ensuring fair wages in production.
