On 30 September, the US, Mexico and Canada reached a deal to update the North American Free Trade Agreement (NAFTA), renamed the US-Mexico-Canada Agreement (USMCA).

"While the deal preserves the main elements of the original agreement, it includes revised regional content and labor requirements that will increase production and compliance costs for manufacturers operating in the region," says Bruce Clark, Moody's Senior Vice President and lead auto analyst, in the report. "However, we expect the changes to be manageable overall for the North American auto sector and to have a limited impact on the creditworthiness of auto manufacturers and suppliers."

New requirements will raise compliance and production costs

While the rules of origin requirement is already place, the wage rule is new and will require manufacturers to establish documentation and tracking capabilities.

Auto manufacturers whose vehicles do not currently comply with the new requirements will need to source more expensive components from the US or Canada or relocate assembly plants to the US and Canada, which would be very costly. Moreover, production launches usually require long lead times and result in significant incremental costs. Alternatively, manufacturers may choose to pay the import tariffs applied to non-USMCA compliant products.

Higher costs will hit automakers' margins or sales volumes, or both, depending on whether they absorb the cost increase or pass it on to consumers.

North American manufacturers are better positioned than foreign competitors; GM is best positioned to adjust to the increased costs.

We expect the impact on auto parts suppliers to be minimal and manageable, as these companies maintain strong relationships with their auto manufacturer customers.

Tagged: North American Free Trade Agreement

Moody's: New NAFTA deal modestly negative for North American Auto Sector