Toyota made a huge announcement today [SEE HERE] that’s a direct outcome of the NAFTA replacement USMCA trade deal; and the new 75% rule of origin within the Auto sector.
The Toyota announcement is a total of $13 billion investment and includes expanded component part production in: Alabama ($288 million), Kentucky ($238 million), Missouri ($62 million), Tennessee ($50 million) and West Virginia ($111 million). Additionally, Toyota will open a new assembly plant in Huntsville, Alabama ($1.5 billion) and serious investments in several other areas. [Details Here]
The guiding decision here relates specifically to the construct of the USMCA (NAFTA replacement). Toyota was previously focused on multi-billion-dollar investments in Canada as they exploited the NAFTA loophole and procured component parts from Asia for North American assembly and shipment into the U.S. Market. However, when they renegotiated NAFTA and created the USMCA President Trump and USTR Lighthizer closed closed the loophole.
The new USMCA agreement requires that 75% of automobile parts must be made in North America; and 45% must come from plants with minimum labor costs ($16/hr); or face tariffs to access the U.S. market with the finished good. As a result Toyota has to either pay a tariff to continue importing Asian component parts, or move the higher-wage component manufacturing directly into the U.S.
Obviously, Toyota chose the latter. They made the best decision for their financial plan; and the right decision for the U.S. This outcome is exactly how tariff and countervailing duty applications are supposed to work to protect U.S. workers and manufacturing.
With the increased Steel and Aluminum manufacturing coming on-line, also a result of well-placed countervailing duties, the raw material for the Toyota component group is now available in the U.S. to make the parts 100% Made in the USA.
How’d ya like them apples.
Oddly enough we predicted these moves in August 2018 right after we learned of the USMCA details. At the 30,000 ft level, the USMCA deal positioned Mexico and Canada to retain the current multinational investments, but slowly work through a process to withdraw any advanced manufacturing investment. Through a series of sector-by-sector standards on origination the USMCA deal puts the decision-making on the companies while simultaneously closing the fatal NAFTA loophole.
The USMCA agreement makes an economic manufacturing partnership between the U.S., Canada and Mexico. For assembly products like Autos third party component providers will have to produce the actual parts and origination material within North America.
U.S.T.R. Lighthizer put the details forward: ♦The NAFTA Loophole closure is explained in Summary Form HERE; with emphasis on the Auto-Sector. The key is a 75% part origination level for auto-assembly; and a 40-45% level for parts with a minimum $16/hr wage rate. The final auto-sector source-origination rate (75%) was higher than anyone thought possible during the lengthy negotiations.
Keep in mind Toyota is not the first Auto manufacturer to respond with increased U.S. investment. Prior to the USMCA German auto-maker BMW began building a $2 billion assembly plant in Mexico. Under the old NAFTA plan most of BMW’s core parts were coming from the EU (steel/aluminum casting components, engines, transmissions etc.) and/or Asia (electronics, upholstery etc).
However, under the USMCA the Mexico BMW assembly plant has to source 75% of the total component parts from the U.S, Canada and Mexico; with 45% of those parts from facilities paying $16/hr.
The result was BMW needing to quickly modify their supply chain, build auto parts in the U.S. and Mexico, or they would end up paying a tariff on the assembled final product.
Like Toyota, BMW made the financial decision to open a new engine and transmission manufacturing plant in South Carolina…. exactly as Trump and Lighthizer planned.
And don’t forget Fiat Chrysler made a similar announcement in February: “The automaker says it will hire 6,500 workers and invest $4.5 billion by adding a new assembly plant in Detroit and boosting production at five existing factories.” (more)