North America is a trade super region, and a key market for entry as competitive advantages demand that manufacturers reduce logistics costs and navigate tariffs. Although currently shrouded in uncertainty, North America will emerge as a renewed force as manufacturers get a clear understanding of trade agreement impacts, adjust their business strategy and make competitive decisions that increase productivity.
USMCA as an Extension of NAFTA
Since its initiation in 1994, The North American Free Trade Agreement (NAFTA) has helped North America to become one of the most competitive regions for manufactured goods and consolidated pre-existing regional connectivity in trade, commerce, and Foreign Direct Investment. Historical data shows that from the age of NAFTA up until today, regional free trade has been concentrated in the manufacturing sector, particularly in automotive industries.
The United States Mexico Canada (USMCA) agreement, signed in 2018 but pending ratification, is noted to be more of an extension of the NAFTA than a new agreement entirely, with changes based on modern trends and attempts to resolve issues of the past. The new agreement has posed some changes for the auto sector. It tightens the Rule of Origin, stating that 75% of light vehicles and parts (70% for heavy) will need to be produced within North America in order to qualify for no tariffs, up from 62.5% (60% for heavy) in NAFTA. This provision, as well as that requiring 70% of a vehicle’s steel and aluminum to be produced in North America, encourages auto production to remain within the region. The labor content value (LCV) rule of the USMCA mandates that 40-45% of automotive products be made by workers who must be paid at least 16$ USD per hour by 2023, attempting to narrow the wage gap in the region.
The agreement opens up Canada’s dairy market and promotes free agricultural and energy trade within the region. It tightens laws on Intellectual Property Rights and loosens those on E-commerce. There are slight changes to the dispute settlement mechanism, and a new sunset clause.
Take a quick look at the impacts of the implementation of the USMCA.
Competitiveness Through Collective Collaboration
The regional labor content value rule changes “will help North America to become more similar in terms of costs”, mentions Alvaro Garcia, HR Director at Prodensa, and is “an opportunity for Mexican workers to become more competitive in terms of their income and (it will) drive productivity”, adds Alejandro Mendoza, COO. North America, as a super region, will benefit in both growth and competitiveness with a collective collaboration, which begins with competitive wages that drive top talent in the industry.
Sources
https://fas.org/sgp/crs/row/IF10997.pdf
https://www.bbh.com/en-us/insights/nafta-s-past–present-and-future-as-usmca-32568
https://www.bbh.com/en-us/insights/nafta-s-past–present-and-future-as-usmca-32568
Mexican Labor Reform Facilitating the Implementation of LVC in the USMCA
From the perspective of different specialists including Alvaro Garcia, the Mexican Labor Reform is the most profound change to our labor legislation in recent dates. Most notably, the transformation of the labor justice system will shift from an administrative justice system to a judicial system which will professionalize the provision of labor justice for the benefit of both workers and employees. Additionally, the labor reform evolves collective bargaining in favor of Mexican employees, allowing freedom of association which will mark a new stage in both trade and union life.
Read more from Prodensa´s HR Director, Alvaro Garcia.
➡️ Read more: Labor Law Reform: a Long Way to Go
Mexican Competitiveness
As a top trading partner with the United States and a bordering neighbor, Mexico holds a key stake in the North American super region. Proximity, talent and competitive labor costs play major roles in creating a successful environment for many manufacturers to find a competitive advantage in their markets.
Mexican Labor Costs
Mexican wages have been historically lower than other countries in the world, including many other developing nations, China, and neighboring U.S. and Canada. In addition, wages have stayed relatively stagnant for 10 years, despite growth rates in productivity and skill level of its labor force. This has contributed to the country being a popular destination for foreign investment, as many international firms have set up manufacturing operations there.
Especially after Mexico became a part of NAFTA, the Rule of Origin facilitated the movement of more Canadian and American automotive companies to Mexico to benefit from both lower labor costs and minimal tariffs. Foreign investment has helped facilitate the advancement of a skilled workforce, infrastructure, productivity, and opportunities for local firm growth. FDI has also helped Mexico diversify its economy and exports. All of these factors have contributed to Mexico’s growth and competitiveness.
Even as new labor wage content rules proposed in the USMCA work to raise certain automotive assembly wages in Mexico, competitiveness will not diminish. The changes are “implementing rules from (Mexico’s) 2017 constitutional reforms”, mentions Alvaro. “(It is) supporting a lot of changes for the rights of Mexican workers”, adds Alejandro. Competitive wages in North America will drive manufacturing competitiveness against other regions of the world, fueled by collaboration between Canada, United States and Mexico in knowledge transfer, technology and advanced manufacturing capabilities, and energy reform, among others.
Sources
https://fas.org/sgp/crs/row/RL34733.pdf
http://www.economia-snci.gob.mx/sic_php/pages/washington/invierte/us_fdi_mexico.htm#
Strength in Diverse North American Culture
- Power distance: The Canadian and American labor environments are almost twice as much more distributive of power and decision-making than more hierarchical structures in Mexico.
- Individualism: Canadian and American employees are expected to be more self-reliant, while Mexican work culture is group-oriented.
- Masculinity: While Canadian workers are moderately motivated by competition and achievement, the U.S. and Mexico are slightly more intense in this aspect.
- Uncertainty avoidance: The U.S. and Canada are accepting of creativity and new ideas, while Mexico will be twice as likely to rely on traditional patterns of workplace behavior.
- Long term orientation: Canada, in this measuring factor, is shown to be overall respectful of traditions and achieving quick results, although less so than the U.S. and Mexico.
- Indulgence: All three countries, yet more Mexico, show little restraint over their desires and impulses.
Prodensa’s multicultural workforce and locations help us understand international companies who set up operations in foreign labor cultures. The ability to understand labor culture translates to excellence in leading employees. Over 35 years Prodensa has implemented best practices in Human Resources for multi-national corporations from all parts of the world.
“There are so many things needed to make it work”, mentions Alejandro, “but in order to make (North American trade) a win-win-win scenario there needs to respect for the different countries, to respect those differences and at the same time learn to do more with those differences and try to make them into a competitive advantage compared to other regions”.
Alejandro Mendoza
COO & Partner
Regional Productivity Driving Competitiveness
The Mexican Labor Law, as an adoption of the USMCA labor value content rules will “motivate a more productive environment and better working conditions for employees” in Mexico, mentions Emilio Cadena, CEO of Prodensa. Regional productivity in manufacturing, such as the response of the industry to consumer trends and demands, fosters “regional competitiveness as the most important thing for companies to grow and for consumers to (be able to) have these types of products” he states. This regional or collective competitiveness is driven by the productivity of manufacturing, to be able to “bring products to market within the price, and with the quality and speed that the customer expects”.
Emilio Cadena
President & CEO
The North American Manufacturing Success Story
North American mobility of products and services is increasing more important in a globalized world, driving the competitiveness of the region with collaboration. The labor value content rule proposed in the USMCA “was a well-designed strategy proposed by the U.S. and Mexico, then adopted by Canada… to bring other products from other parts of the world into North America and localize the supply chains in the U.S., Canada and Mexico” states Emilio Cadena.
Sources:
http://www.worldstopexports.com/
https://www.bbh.com/en-us/insights/nafta-s-past–present-and-future-as-usmca-32568
North American Trade: Imports
The United States is a top global consumer industry for a wide range of products. Their top imports paint a picture of its society, business and government. Product mobility and intra-regional trade strengthen North America, and when combined with manufacturing productivity, creates a competitive super region.
Top U.S. Industries (2018)
- Machinery including computers (14.8% total imports)
- Electric machinery, equipment (14%)
- Vehicles (11.7%)
- Mineral fuels, including oil (9.2%)
- Pharmaceuticals (4.5%)
Top U.S. Products (2018)
- Cars
- Crude oil
- Phone system devices
- Computers, optical readers
- Medication mixes in dosage
Top Canadian Industries (2018)
- Vehicles (16.4% total imports)
- Machinery including computers (15%)
- Electric machinery, equipment (9.8%)
- Mineral fuels, including oil (7.9%)
- Plastics, plastic articles (3.7%)
Top Canadian Products (2018)
- Cars
- Automobile parts/accessories
- Processed petroleum oils
- Crude oil
- Trucks
Top Mexican Imports by industry (2018):
- Electrical machinery, equipment: (20.4% of total imports)
- Machinery including computers: (16.7%)
- Mineral fuels including oil: (10%)
- Vehicles: (9.3%)
- Plastics, plastic articles: (5.4%)
Top Mexican imports by product (2018):
- Processed Petroleum oils
- Automobile parts/accessories
- Integrated circuits/micro assemblies
- Phone system devices including smartphones
- Computer, optical readers
In 2018, 25.8% of U.S. imports came from North America as well as 58% of Canadian imports and 48.9% of Mexican imports.
North American Trade: Exports
When a country exports goods, it sells them to a foreign market, that is, to consumers, businesses, or governments in another country. Those exports bring money into the country, which increases the exporting nation’s GDP. About 1/3 of US exports (33.9%), 76.5% of Canadian exports and 79.6% of Mexican exports were sent within North America.
Top U.S. Industries (2018)
- Machinery including computers (12.8% total exports)
- Mineral fuels including oil (11.4%)
- Electrical machinery, equipment (10.6%)
- Aircraft, spacecraft (8.4%)
- Vehicles (7.8%)
Top U.S. Products (2018)
- Processed petroleum oils
- Cars
- Crude oil
- Automobile parts/accessories
- Integrated circuits/micro assemblies
Top Canadian Industries (2018)
- Mineral fuels (22% total exports)
- Vehicles (13.5%)
- Machinery including computers (7.7%)
- Gems, precious metals (4%)
- Wood (3.2%)
Top Canadian Products (2018)
- Crude oil
- Cars
- Gold (unwrought)
- Processed petroleum oils
- Automobile parts/accessories
Top Mexican exports by Industry (2018):
- Vehicles: (25.6% of total exports)
- Electrical machinery, equipment: (18.2%)
- Machinery including computers: (16.7%)
- Mineral fuels including oil: (6.6%)
- Optical, technical, medical apparatus:(4.2%)
Top Mexican exports by product (2018):
- Cars
- Automobile parts/ accessories
- Computers, optical readers
- Crude oil
- Trucks
The mobility of products within North America develops a super region that stands as a strong regional trade partner, competitive with all other major global markets. The USMCA and Mexican Labor Reform strengthen the competitiveness of North America and foster collaboration across borders by capitalizing on cultural differences, localizing supply chains and responding to tomorrow’s challenges, all with the intention of sustainable competitiveness.
Prodensa as an Industry Leader
Helping Clients Succeed
“All the pieces of the puzzle are there” mentions Emilio, and all three agree that the implementation phase will be the most challenging in the months and years to come. “Employers will need to be more aware and get more involved with their workers” mentions Alejandro.
In addition to getting close to your people and processes, it´s also important to understand business impacts on supply chain, finance, tax and international trade. Knowing how you or competitors can be impacted allows you to create response strategies. Prodensa has the experts in their fields that have walked over 600 international clients through the process of strategy and operations compliance in Mexico, all focused to improve the productivity of clients and leave a positive impact on the community.
Being an Employer of Choice
Prodensa HR Director Alvaro Garcia draws emphasis that the Mexican Labor Reform will be an implementation process and that employers must consider current and future changes in key leadership decisions. It´s important to make these decisions from knowledge and awareness is the first step in starting the process.
Being an Employer of Choice in Mexico begins with getting close to your people, understanding both the impacts on your business but also on your workforce. Develop a stronger relationship with union leadership and maintain a constructive communication. Invest in your people and your community, focusing on development and growth. Lastly, focus on sound business decisions and strategy that drive productivity and growth.