The recent panel discussion at the U.S.–Mexico Real Estate Business Summit included Colliers’ supply chain expert and Global Automotive Desk strategic advisor Gregory Healy and Mexico’s Consul of Economic Affairs, Carlos Giménez. In this article, we’ll explore what opportunities the revised NAFTA agreement, USMCA—The U.S.–Mexico–Canada Agreement— offers for North American businesses and commercial real estate developers.

The U.S. and Mexico trade $1.7 billion  in goods and services every day. Our northern Canadian border sees an equivalent amount in bilateral trade daily. This back-and-forth movement of goods and services strongly benefits the economic growth of all three countries, which together support 490 million people.

Relationships with our North American neighbors are vital to the U.S. economy, and with the likely passage of USMCA, all the countries involved will benefit from stronger trade protections and incentives to keep goods and workers in North America.

The agreement, which has been ratified by Mexico and is pending ratification in the U.S. and Canada, is a win-win for industry in North America. It will positively affect the dairy and agriculture trades and also will herald the revitalization of the North American manufacturing industry—an area which saw sustained growth throughout 2018 which continues into 2019. New requirements incentivize manufacturing industries to keep their production in the region instead of outsourcing overseas.

What’s good for the manufacturing industry and the U.S. economy is also good for commercial real estate. Under the USMCA, North American manufacturing businesses would benefit from seeking growth opportunities in their immediate region.

Why the USMCA is a Win for the U.S. Manufacturing Industry

NAFTA has been in place for a quarter of a century, and in that time, the economic partnership between Mexico, Canada and the U.S. has strengthened.

“By celebrating a quarter of a century after the entry into force of NAFTA, we can say that at a regional level, Mexico, the United States and Canada are neighbors, partners, friends and economic allies,” Giménez told summit participants.

Mexico, in particular, is the second-largest export market for U.S. and the second-largest supplier of goods, as of 2017. “Mexico and the United States have a high degree of interdependence. What happens on one side of the border affects the other,” Giménez said. This mutually beneficial interdependence only becomes stronger with the USMCA.

The USMCA agreement affects many industries, but it will have a particularly large impact on the automotive and manufacturing industries. Automotive parts and vehicles represent the biggest portion of commodities that the U.S. imports from Mexico and also a large percentage of our exports.

Under the new USMCA guidelines, to avoid tariffs in North America, vehicles must be manufactured from at least 75% North American parts, an increase from the previous 62.5% required by NAFTA. This means automotive manufacturing industries in Mexico, Canada and the U.S. should experience a surge of demand as fewer parts can be outsourced to parts of the world with cheaper manufacturing costs, like Southeast Asia.

Industry leaders will rightly look to establish more manufacturing outposts in North America to avoid incurring tariffs for automobiles sold in North America. This of course means a need for more commercial real estate locations in North America. And leaders must be strategic in choosing locations for new manufacturing hubs, taking into account factors like the distance to suppliers and consumers and the local labor supply. Real estate selection services, like Colliers’ Indsite, take a holistic approach that factors in labor supply, drive times, labor force participation and other considerations.

The USMCA will also establish higher quotas—from 1.8 million Canadian and Mexican vehicles that can be imported to the U.S. without tariffs, to 2.6 million—on both vehicles and auto parts, making North American vehicle manufacturers key to meeting demand.

A wage component narrows the gap between workers in Mexico and the U.S. and makes it more feasible for providers in the supply chain to keep manufacturing operations—or build them—in the U.S. Under the new agreement, all North American workers will be required to be paid at least $16 per hour for 40% of the work done on each vehicle, closing a gap that incentivized low wages.

Historically, workers in Mexico have been paid considerably less than U.S. workers, making it much cheaper to outsource work to Mexico. U.S. auto workers at the Big Three—Chrysler, Ford and General Motors—make $28 per hour on average, and workers at foreign automakers based in the U.S. make between $20 and $26 per hour. Mexican auto workers, in contrast, make an average of $3.14 per hour.

The USMCA means that instead of U.S. workers being paid five or 10 times what an auto worker in Mexico earns, they will now be paid only a few dollars more. Add to that the cost of transporting parts and vehicles to the U.S. from Mexico, and there’s much more incentive to utilize American auto workers. And it’s good for labor in Mexico as well, leveling the economic playing field for both countries.

“We see the Mexico–United States relationship as a fertile field for investment and business,” Giménez noted, and that’s certainly true, especially for automotive suppliers and makers, as well as laborers in both countries. 14 million U.S. jobs depend on trade with Mexico and Canada, and the new USMCA will only expand that number.

What Does This Mean for Commercial Real Estate?

Expanding jobs mean a growing need for more space—particularly, more industrial spaces. While industrial space has been growing apace in the U.S., in Mexico, the newly elected administration of President Andrés Manuel López Obrador has made boosting infrastructure and development a priority, especially in the southern part of the country.

Industrial space in Mexico is growing at an average rate of 5% per year, with low vacancy rates making plenty of room for more growth. Tariff agreements with the U.S. and other countries worldwide make Mexico an ideal place for manufacturers and auto parts makers to set up shop.

These tariffs, combined with other factors like the labor and materials cost and close location, make Mexico a less expensive option than China. New tariffs on China by the current U.S. administration make Mexico an even more feasible option.

The economic truth, put simply, is that no matter the industry, if manufacturers are looking to sell in North America, they should be manufacturing in North America. Choosing their site carefully to leverage distance between both suppliers and customers can help reduce overall supply-chain costs.

Gregory Healy, Senior Vice President, leads the U.S. Supply Chain and Logistics Consulting team. With over 20 years of global manufacturing and supply chain experience as both a senior executive in the corporate world, as well as owning a supply chain consulting practice and a third party logistics business, Gregory has real world experience that brings a unique perspective to the Colliers team.