In the wake of the United States-Mexico-Canada (USMCA) trade agreement (the framework that outlines trade tariffs between the U.S., Mexico and Canada), analysts predict long-term impacts to supply chains as organizations adjust to shifting profit flows and supplier agreements. In an article penned for Forbes on Friday (April 19), LevaData Founder and CEO Rajesh Kalidindi predicted that “there will be unforeseen impacts and volatility arising directly from the USMCA framework.”
The greatest effect on the region’s supply chains will be the USMCA‘s impact on wages, tax incentives and foreign investments at Mexico plants — particularly for the automotive industry, since Mexico currently ranks as the second-largest vehicle supplier to the U.S. LevaData research found that nearly two-thirds of surveyed executives in the automotive industry believe the USMCA will lead to higher costs on manufacturers, linked to higher labor and raw materials costs.
“To avoid making the consumer absorb all these costs, procurement managers will be under pressure to find marginal savings,” wrote Kalidindi, who noted that supply chain professionals must re-evaluate reliance on imported components. “Because of just-in-sequence flow of sub-commodity suppliers to manufacturing centers, supply chain executives might be better off locking in new capacity and volume agreements rather than prices,” adding that flexible agreements like those seen in the technology sector should begin to appear in the automotive supply chain as well.
Furthermore, the U.S.-China trade disagreements, and adjustments to tariffs, are likely to affect trade between the U.S., Canada and Mexico as well, as microelectronics — China’s largest export — become of larger importance to car manufacturing and the overall value of vehicles. Tariff spikes on Chinese imports could increase prices and force Mexican microelectronic manufacturers to consider ramping up capacity, though Kalidindi noted that may not always be possible.
“To handle these risks,” he wrote, “procurement mangers should be using a five-year window to assess their supply chains, with an eye on sources of supplies and sub-commodities, capital appropriation, and the location of plants and other key assets.”