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Trade War

Asian carmakers rethink strategies as updated NAFTA looms

Unofficial requirement to buy American parts risks driving up costs

Workers at a Nissan Motor plant in the Mexican state of Aguascalientes assemble a Sentra sedan. Nissan sources 55% of the Sentra's content from Mexico. (Photo by Keiichiro Asahara)

TOKYO -- Monday's deal by the U.S. and Mexico to revise the North American Free Trade Agreement set new requirements to keep the zero-tariffs policy in place and will force Japanese, South Korean and European automakers to rework their regional strategies.

Japanese automakers were among the earlier parties to move much of their production for the U.S. market to North America in response to a rising yen and trade tensions between Tokyo and Washington in the 1980s and '90s. After NAFTA came into force in 1994, Mexico and Canada became export bases for U.S.-bound autos thanks to cheaper labor and the lifting of tariffs under the new agreement. Of the 6.7 million autos sold by Japanese players in the U.S. last year, 690,000 were made in Mexico and 770,000 in Canada.

Under Monday's deal, vehicles would be exempt from tariffs only if at least 75% of their content comes from the U.S. or Mexico, compared with 62.5% from all of North America under NAFTA. And 40% to 45% of parts would have to be made by workers earning at least $16 an hour. With wages in Mexico's auto industry far below that level, this in effect all but forces companies to buy American.

With a broad bilateral accord in hand, President Donald Trump will likely spare Mexico from a threatened 25% additional tariff on imported vehicles, averting the worst-case scenario for automakers with production operations there. But some elements of the deal -- which would be phased in from 2020 and expected to take complete effect in 2023 -- could put pressure on companies to change their procurement plans.

Nissan Motor, one of the first Japanese automakers to set up shop in Mexico, sources a large share of parts from the country. About 55% of the content of its Sentra sedan comes from there, with only 20% originating in the U.S. and Canada, data from the National Highway Traffic Safety Administration shows. Nissan's Versa sedan, with 70% North American parts, is one of a handful of models that meet the current requirement but would fall short of the 75% threshold.

The Mazda3 compacts sold by Mazda Motor in the U.S. consist almost entirely of Japanese and Mexican parts. Both Nissan and Mazda export from Mexico more than 20% of the vehicles they sell in the U.S.

Kia Motors Mexico, a unit of South Korea-based Kia Motors, exports 85% of the cars it produces, with about half of those going to the U.S., according to Reuters. Managing Director Horacio Chavez told the news service last year that Kia Motors Mexico was well-positioned to deal with the 2.5% tariff that would be levied on cars going into the American market if NAFTA negotiations failed.

Kia is analyzing the renegotiation from various angles and making plans to minimize the impact on Mexican operations, a Hyundai Motor group official told South Korea's Maeil Business Newspaper on Tuesday. Kia is an affiliate of Hyundai.

American and European automakers with operations in Mexico could feel the impact of the wage requirement as well. Ford Motor sources as much as 70% of the content of some sedans from the country.

U.S. Trade Representative Robert Lighthizer put American interests front and center in NAFTA negotiations, initially demanding a minimum of 85% North American content, with 50% coming from the U.S. Talks remained deadlocked at first as Canada and Mexico banded together to protect their own interests.

A breakthrough came when Mexico agreed to bilateral talks, bowing to American pressure after an election last month rendered President Enrique Pena Nieto a lame duck. With Trump seeking visible results on a signature issue ahead of November's midterm congressional elections, Washington scaled back its demands at the last minute, and the two sides reached a compromise.

The U.S. was set to resume talks with Canada on Tuesday based on this deal. But Washington and Ottawa remain at odds over such issues as agricultural goods, with Trump taking particular exception to high tariffs on American dairy products.

The president has raised the possibility of signing a bilateral agreement with just Mexico if an accord cannot be reached with Ottawa. "One way or the other, we have a deal with Canada," he told reporters Monday. "It'll either be a tariff on cars, or it'll be a negotiated deal."

Rising anti-Trump sentiment in Canada has given Prime Minister Justin Trudeau little room to compromise with a general election coming up next year.

If Canada is left out of the new trade framework, Toyota Motor will be hit particularly hard. Toyota produces about 570,000 vehicles there annually -- roughly four times its Mexican output. Tariffs on auto imports from Canada would force a drastic overhaul of production and logistics for the group's North American operations as a whole, according to a Toyota-affiliated parts maker.

Automakers carefully consider procurement plans for each model from the development phase, taking quality, delivery time and cost into consideration. Changing suppliers is no easy task.

If companies buy more parts from the U.S. to meet the wage requirement, "production costs will inevitably go up," said Masahiro Akita of Credit Suisse Securities (Japan). Some may just pay the 2.5% tariff rather than deal with the hassle of maintaining the exemption.

Nikkei staff writer Takeshi Kawanami in Washington contributed to this report.

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