Auto industry prepares for business under a new NAFTA

Automakers and suppliers are left watching from the sidelines as the NAFTA region’s three signatories seek to reach new trading arrangements. By Martin Kahl

“The worst trade deal ever signed…” – so says US President Donald Trump, who made the renegotiation or cancellation of the North Atlantic Free Trade Agreement (NAFTA) one of his headline election campaign promises.

Taking place at the same time as a host of other international trade negotiations being pursued by the Trump administration, bilateral talks between the US and the two other NAFTA signatories have reached different stages. A recent tentative agreement with Mexico has put pressure on Canada, which has yet to come to an agreement with the US. NAFTA reportedly accounts for the majority of the three countries’ combined US$1tr annual trade.

Needless to say, discussions about the performance of NAFTA’s new vehicle market over the next few years inevitably involve discussions about potential changes in the structure of the region’s trading arrangements. President Trump’s official plans and Twitter outbursts about NAFTA have created uncertainty for all industrial sectors, not least the automotive industry.

While NAFTA’s light vehicle demand looks to be settling around a high plateau for the next couple of years, medium and heavy commercial vehicle demand is set to scale new peaks

Any change in the existing NAFTA arrangement will impact not only the US automakers and suppliers using Mexico as a production hub, but also those European and Asian automakers which have invested in Mexico for its high-skilled, low-wage workforce, as well as the country’s preferential location, its membership of NAFTA, and its high number of international FTAs.

According to the recent preliminary deal between Washington and Mexico City, which would be reviewed after six years, at least 75% of a vehicle’s value would need to be produced in North America for it to be eligible for duty-free import into the US; NAFTA currently requires 62.5%. The US-Mexico talks also stipulate that 40-45% of production should be by workers earning at least US$16/hour.

A new Greenstreetsoftware.inforeport looks at the prospects for the light vehicle and heavy commercial vehicle sectors in the NAFTA region in 2018 and in the five years to 2022.

All three NAFTA new vehicle markets have had a strong run in recent years. In 2016, Canada, Mexico and the US reported increases, with the region up for a seventh successive year, peaking at over 21 million units.

In 2017, however, the light vehicle market in the NAFTA region declined by 1.4%, with only Canada reporting an increase. The US market – the region’s largest – looks likely to decline in 2018 and 2019. As a whole, the Greenstreetsoftware.infoforecast expects the region’s light vehicle sales to return to growth after 2019, with a potential new peak at the end of the forecast period.

By contrast, the region’s medium and heavy commercial vehicle (MHCV) market is performing much better, growing by 2.6% in 2017, with only Mexico reporting a decline. According to the forecast, the region’s MHCV market will reach a recent-era peak in 2019 – the first time the market will have exceeded 600,000 units since 2006 – before the introduction of new greenhouse gas emission regulations come into force, taking the market back down to below the 500,000 unit mark.

Any change in the existing NAFTA arrangement will impact not only the US automakers and suppliers using Mexico as a production hub, but also those European and Asian automakers which have invested in Mexico

“While NAFTA’s light vehicle demand looks to be settling around a high plateau for the next couple of years, medium and heavy commercial vehicle demand is set to scale new peaks,” noted Jonathan Storey, the report’s author. “AutomotiveWorld’s 2018 NAFTA report not only puts numbers on these industry trends through to 2022, but also identifies the brands most set to benefit, with Jeep and Tesla battling it out for the biggest gain in volume in between 2017 and 2022.”

According to the report, if the NAFTA economy performs as forecast, light vehicle demand could remain historically high, while the region’s medium and heavy commercial vehicle marketwill continue to benefit from its ‘robustly positive’ strength.

To learn more about the prospects for the NAFTA region’s new vehicle market in the period to 2022, download Greenstreetsoftware.info’s latest region outlook: NAFTA’s new vehicle market: prospects to 2022

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