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In the aftermath of the US election, President-elect Donald
Trump's return to the Oval Office has sparked speculation about his
intentions during his second term, particularly regarding the
automotive sector. As the world observes, the intersections of
politics, industry, and trade have become focal points, with the
administration's stance on the Inflation Reduction Act (IRA) and
its impact on electric vehicle supply chains at the forefront.
Additionally, the alliance between Elon Musk and the Trump campaign
introduces a new dynamic. Amid these developments, Trump's “America
First” doctrine looms large, poised to reshape trade relationships
and unsettle foreign investments.
We can be more certain about Trump's “America First” approach.
In his first administration, this meant imposing tariffs or
threatening them as a negotiation lever. The target of these
tariffs depended on the direction of travel and the size of the US
trade deficit with various partners. For reference, the three
biggest contributors to the US' US$1.14 trillion
deficit are — in order — mainland China, the
EU and Mexico.
As documented previously,
Mexico has achieved great success in attracting foreign direct
investment (FDI) into its automotive sector, according to data from
Directorio Automotriz. In the first three quarters of 2024, auto
investment has continued to flow into Mexico, albeit at a slower
rate (a decrease of 13.6%) compared to 2023. During this period,
the value of auto FDI from mainland China has increased by over 86%
to US$3.5 billion.
Given where the future administration's gaze is likely to rest,
the increased mainland Chinese investment will raise concerns.
Thus, it is not surprising that on the campaign trail, Trump raised
the prospect of rewriting the United States-Mexico-Canada Agreement
(USMCA) trade agreement. Additionally, while campaigning in North
Carolina, Trump posited a 25% to 75% tariff on all Mexican goods
— not just light vehicles — if the country did not assist
the US in curbing illegal immigration. This threat is implicit in
requiring a rewrite of the USMCA.
A six-year renegotiation provision is included in the original
USMCA, meaning that renegotiations are scheduled to begin in July
2026. However, there will be much more horse-trading and public
pronouncements before then.
And therein lies the problem. Tariff or no tariff, large capital
expenditure projects—such as automotive investments—require
certainty in the business environment and clarity of policy before
any dollars are committed. Thus, much of the focus on the USMCA
renegotiation will be on Mexico due to the trade deficit. It will
be revealing to see whether Mexican automotive FDI is
sustained.
To date in 2024, the volume of investments has slowed compared
to 2023, even though the value of FDI peaked in the third quarter
of 2024, with over US$3.5 billion invested.
Cumulatively, mainland China is the largest source of FDI for
Mexico's automotive sector. Interestingly, the country contributing
most to its cumulative investment in the third quarter of 2024 was
the US, which may indicate that companies want to secure
investments before USMCA rules are changed—something the
Democrats also vowed to review during the campaign.
Mexico has thrived as an FDI location due to its access to
sizeable markets through various trade agreements. However, the
biggest draw for companies remains tariff-free access to
neighboring markets via the USMCA. These benefits were also offered
under the previous NAFTA agreement, and little has materially
changed since the USMCA became operable in 2020. Both agreements
have attracted original equipment manufacturers (OEMs) to build
vehicle manufacturing capacity in Mexico; and where OEMs tread
their suppliers will follow. Between 2015 and 2025, Mexico is set
to be the third-largest contributor to global light vehicle
capacity growth. According to S&P Global Mobility data, just
over 2 million units of capacity will be added, giving Mexico a
31.2% share of total global capacity growth. Where the USMCA does
differ from NAFTA is that it aims to encourage increases in Mexican
labor rates and improved employment standards. Colleagues at
S&P Global Mobility expect the 2026 renewal talks to focus on
narrowing the Mexican wage rate differential compared to the US and
Canada.
This analysis pre-supposes that the Trump administration will
wait until July 2026 to review the USMCA. However, Trump is
unconventional in his approach to government. Reports suggest the
administration may impose 100% tariffs on car imports from Mexico,
violating the USMCA agreement. However, the USMCA does allow for
tariffs to be imposed on a member in certain circumstances. Such
circumstances include: National security concerns including defense
and national infrastructure, non-compliance with labor and
environmental standards, or if trade remedies are required whereby
surging imports harm local industries and anti-dumping and
countervailing tariffs are required. If the Trump administration
were to pull any of the available levers, or threaten to, the
febrile and uncertain environment would intensify and dampen
automotive investment commitments in Mexico.
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