July 16, 2022


Development Engines

NAFTA, electric vehicles, and the evolution of Mexico's auto industry

In December 2021, President Joe Biden announced a proposed consumer tax incentive for electric vehicles (EV) made in the US by unionized autoworkers.1 The tax incentive promises to support the transition to “green technologies,” curtail dependence on fossil fuels, and “decarbonize” the economy, while strengthening collective bargaining after decades of state-led efforts to weaken unions.

Unsurprisingly, the proposal encountered opposition. In the US, Honda, Kia, Nissan, Hyundai, and Tesla opposed the bill on the basis of its union-made incentive; it only benefits Ford, General Motors, and Chrysler—Detroit’s Big Three whose workforces are famously unionized. If the concern is climate change, business analysts asked, why not expand the credit to companies that are already manufacturing electric cars? The incentive also sparked accusations of protectionism. The Mexican government argued that a tax incentive contravenes the USMCA trade deal “by granting undue advantage to US-built vehicles.” Since the EV tax credit is a type of subsidy, it goes against World Trade Organization rules. The European Commission also opposed the incentive, arguing that it discriminates against EU car and car-component manufacturers, which employ 420,000 workers within the US.

The row over the EV tax incentive exposed the tensions between domestic policies and free trade rules in a highly integrated regional economy. Policies to secure jobs for a particular workforce potentially make jobs even more uncertain for other workforces employed in the North American automotive sector. This includes Mexico, where the automotive sector represents 20 percent of GDP.

Prior to the North American Free Trade Agreement (NAFTA), Mexico’s automotive sector was directed by domestic policy. National and local policies aimed to  build a capital- and labor-intensive manufacturing sector, thus serving as a source of job creation. This changed in the 1990s. With the formation of the North American geo-economic region in 1994, car production came to implicate foreign policy, trade agreement rules, transnational corporations, and international unions. Today, car production is far more complex than simply setting up a factory in a particular locale. Tracing Mexico’s automotive industry over six decades illuminates how the North American automotive sector of the present combines local, domestic, and global interests, each carrying distinct consequences for labor, industrial policy, and now, climate strategy.

Building Mexico’s automotive sector 

In a bid to spur industrial development, in 1962 the Mexican government decreed that 60 percent of each car sold in Mexico must be manufactured domestically.2 This required multinational automobile corporations partnering with local businesses to establish car factories, strengthening Mexico’s oligarchy while developing the domestic car industry.3 A national automobile industry was integral to Mexican industrialization, as car production was closely linked to the iron, steel, rubber, plastic, glass, and oil industries.4    

Domestic policies gave preference to industry over small-scale agricultural production. State-led industrialization via the economic model of import-substitution industrialization (ISI) benefited car corporations by way of protectionist policies, tax concessions, and infrastructure (such as highways). The government also gave manufacturers cheap access to land expropriated from peasants, as it considered factories to be of public interest. Volkswagen Mexico, located in Puebla, 81 miles south of Mexico City, benefited from three such land expropriations.5The state also played a major role in directing production: in 1969, for example, the government required car companies to increase their exports to balance out the imported content of their vehicles.6

The automotive industry propelled the rise of a waged, skilled, and mostly male working class in Mexico. The industry’s development in the 1960s coincided with the rise of state-provided social services and infrastructure—public healthcare, credit for buying houses, and subsidized food stores—which were geared toward autoworkers and their dependents. Whereas public education is a right based on citizenship, healthcare and credit for housing are only accessible to those formally employed in the public or private sectors.7 This system of public services supplanted low wages—workers regularly worked double or triple shifts in order to meet the cost of living—but still enabled autoworkers’ social mobility. The social safety net had a clear preference for industrialized workers over other sections of the working class, such as peasants. Under ISI, corporations, state-owned companies, and a mostly male industrial workforce in the oil, automotive, and electric sectors benefited from national policy.

Labor had little influence over industrial policy. Since the 1930s, state-allied unions have dominated Mexico’s labor movement, and when it came to the automotive industry, they endorsed contracts that primarily served company interests and deterred any labor unrest that resulted. Independent unionism emerged in the automotive sector in the 1970s, encouraging internal union democracy and union control over the labor process at the factory level, but these unions were excluded from the policy debates that concerned the automotive sector.8 Nevertheless, organized labor gained victories during during pro-labor governments.9

In the 1970s, Mexico shifted from ISI to an export-oriented industrialization (EOI) strategy. Factories owned by transnational corporations known as maquiladoras still benefited from the ISI practice of providing facilities to companies moving to Mexico. What changed, however, was that at maquiladoras, the materials brought from the US were assembled in Mexico, and then exported back to the US for sale.10 The rise of EOI was simultaneous with austerity measures imposed by the IMF in the aftermath of Mexico’s debt crisis in the 1980s. As a result, in the 1980s and 1990s, Mexico cut state subsidies, privatizing state enterprises, education, and healthcare. Domestic policy moved towards the creation of low-paying jobs contingent on market conditions and simultaneously undoing the system of social services that defined the ISI era. 

The NAFTA shift

Although the development of an export-oriented strategy de facto ended ISI through the 1970s, it was only formally terminated by decree in 1989, in order to create a legal structure for NAFTA at the national level. At the time of signing in 1992, NAFTA created the largest free trade zone in the world, part of an emergent multilateral trade order in which free trade agreements effectively wrote the “constitution of a single global economy.” By this point, the maquiladora model dominated the auto industry.11 NAFTA and the introduction of just-in-time production in the automotive sector lowered costs by increasing flexible specialization. The industry was thus fragmented into three sharply differentiated processes: auto-parts manufacturing, distribution, and car assembling.12

So-called just-in-time drastically restructured production and labor. Car factories continued to do assembly but otherwise outsourced much of the production process to hundreds of companies that handled auto-parts manufacturing, distribution, and tasks only indirectly connected to car production, such as janitorial and cafeteria services, and the preparation of cars for shipment. Today, the segments in the production chain that employ the largest workforces are manufacturing and distribution. The production practice has opened the door to increased labor flexibilization and precaritization: during the past ten years, industrial robots—requiring no human operator—have slowly displaced autoworkers. According to a 2018 report by Stephen Woodman for the Center for International Governance Innovation, “In 2011, there were 83 Mexican autoworkers to every one robot.… By 2015, the ratio had dropped to 19 to 1.”  

With the implementation of just-in-time production, independent unions lost control over the production process, especially in their ability to influence production rates, promotion procedures, and employment security. At the national level, independent unions and their state-allied counterparts lost their already constrained role in negotiating agreements,13 though independent unions were more likely to strike. 

Nevertheless, Mexico’s automotive sector is often considered a major success of NAFTA. The automotive sector has indeed generated employment and increased the labor participation of a younger generation, absorbing it into the ranks of the formal economy. The post-NAFTA era has led to new employment opportunities in engineering, administration, and management. In areas with a high concentration of transnational corporations, local policies attempt to prepare aspiring workers for the standardized test required for employment. Local governments also pay a small bonus to companies to send Mexican workers abroad for training. High-paying jobs, however, are not created at pace and the majority of the jobs created by the automotive sector remain low-paying and precarious. 

ISI laid the foundation for a development model dependent on private corporations for wage labor and the state for land expropriation, and NAFTA consolidated this model. Under NAFTA, the Mexican government continued granting tax exemptions and incentives to entice automotive investments.14 Federal and state governments have given millions of dollars to Toyota, Kia, Mazda, Honda, Volkswagen, Audi and Pirelli, a multinational tire manufacturer, according to a 2016 report prepared by the Automotive Policy Research Center. Kia and Audi also received land donations from the government—533 hectares and 460 hectares respectively. In Nuevo Leon, the government allocated Kia US$115 million in direct incentives, a 20-year waiver for a payroll tax, and US$197 million in infrastructure spending to support the installation of the plant. The land for Audi’s factory, an industrial park that houses its suppliers, and a new city next to the factory, was expropriated from peasants. Along with land, car factories receive unprecedented amounts of water, diverted from peasants to Mexico’s car economy.  

At the national level, corporations remain key players of socioeconomic development. They are the main providers of wage labor, and therefore access to healthcare and housing. Corporations had similar dominance over wage labor under ISI, but during this era the Mexican state had a greater role in delineating industrial policy. At a global scale, corporations exercise a power granted by the laws structuring and regulating free trade. NAFTA was the first trade agreement to establish the investor-state dispute settlement (ISDS) allowing investors to sue a country for “breaching obligations” and causing damages to investors as a result.15 Under NAFTA, the government’s role was in large part to promote investment while keeping labor in check.16

Labor under the United States-Mexico-Canada Agreement (USMCA)

In 2020, NAFTA was replaced by USMCA. Unlike its predecessor, USMCA addresses labor issues directly, with broad effects for labor and organizing in Mexico. Chapter 23 of the agreement includes a mechanism to enforce workers’ individual and collective rights, which has already had positive effects for workers. In 2021, the Mexican government was asked to review potential labor rights violations in a GM factory in Silao and an auto-parts factory in the border city of Matamoros. In February 2022, GM workers elected a new independent union in northern Mexico. UAW President Ray Curry voiced his support for the victory, along with Unifor, Canada’s largest private-sector union.17 UMSCA also includes a clause to improve wages, requiring that “40–45 percent of auto content be made by workers earning at least $16 per hour.” While promising in theory, it is not clear how the requirement will work in practice for those on the shopfloor. So far, Jesús Seade Kuri, Mexico’s chief negotiator on the USMCA, declared that the $16-per-hour requirement is being met through the salaries of engineers and administrative staff.18

UMSCA preserves the integration of the automotive sector across Mexico, the US, and Canada that was emblematic of the NAFTA era—a system where, according to a 2021 report from the US Congressional Research Service, “hundreds of suppliers make parts that cross borders seven or eight times before being assembled into a finished car.” Previously, NAFTA required that 62.5 percent of a vehicle net cost and 60 percent of the cost of its parts had to originate in the North American geo-economic region to obtain free-trade benefits. UMSCA increases the regional content value to a range of 70 to 75 percent, depending on the vehicle, and divides that content requirement into three groups: core parts, main parts, and complementary parts. Through changing the content values, USMCA extends further into the organization of car production, and makes each country’s automotive sector dependent on one another.

NAFTA, and now USMCA, have transformed the automotive sector into a significant engine of jobs and economic growth in the three signing countries. By 2020, the sector represented represented 3 percent of US GDP and employed an average of 4.1 million people. In Mexico, it represented US$78 billion in annual revenues and employed over 1 million people across the country, making it the largest manufacturing sector in the country led by original equipment manufacturers (OEMs). In Canada, the sector contributed CAN$12.5 billion to the GDP and employed 117,200 people directly, as well as 371,400 people indirectly. The three countries are among the largest automotive producers worldwide: the United States is the second largest global car producer and the second largest auto-part manufacturer and exporter; Mexico is the sixth and the fifth respectively; and Canada is among the world’s top twelve producers.

The era of electric cars

Today, emissions-free cars have opened up a new chapter in the North American automotive sector, but competition around clean energy has challenged the era of free trade. With electric cars seen as a path to curtail fossil-fuel dependence, car manufacturers located in Mexico have pledged to phase out internal-combustion engines and hybrid cars over the next two decades. These promises have led to major investments: Ford invested $420 million in a factory in Cuautitlán which currently assembles electric cars; in April 2022, GM announced a US$1 billion dollar investment to upgrade its factory in Ramos Arizpe, Coahuila to begin manufacturing all-electric vehicles in 2023; in March 2022, the Volkswagen group announced a US$7.1 billion investment to produce battery-electric cars throughout North America. GM also announced a $9 billion investment in its US factories to manufacture electric vehicles or battery cells.19 Volkswagen will upgrade factories on both sides of the border. With these simultaneous investments, corporations seem to be committed to distributing car production throughout the North America corridor rather than move production entirely to a single locale. Auto-part manufacturing in Mexico has also seen a bump in production; in 2019, it produced over US$8 billion worth of electrical automotive parts, an 8.3 percent increase from the previous year. The investments have extended down the supply chain. The Chinese company Ganfeng Lithium, a supplier for Tesla, announced the construction of a lithium-ion battery recycling factory in Sonora. The Chinese corporation Contemporary Amperex Technology Co., (CALT)—the world’s largest producer of EV batteries—is considering investing US$5billion in Mexico, Canada, or the US. The construction of battery production and recycling factories are key for complying with UMSCA content requirements, given that, so far, most batteries are manufactured in Asia. 

For Mexico, the shift to emissions-free cars means an opportunity to regain some control over natural resources that fell out of public hands during the twenty-five years of NAFTA. In March 2022, President López Obrador nationalized lithium—required to produce EV batteries—declaring it to be a “strategic mineral” for Mexico. By nationalizing lithium, the Mexican government aims to building a strong and affordable public energy sector. The announcement was controversial. Kenneth Smith Ramos, who headed the technical negotiations to create UMSCA, argued that the bill contravenes UMSCA.20 Katherine Thai, the US Trade Representative, stated that Mexico’s legislation in relation to lithium is “anticompetitive and counter to USMCA protections and provisions” and stymies climate responses by preventing the three signing countries from working together to develop clean energy.

Biden’s EV tax incentive and López Obrador’s lithium nationalization are evidence of nascent competition between the US and Mexico around billions in potential green investments in the automotive sector. In an era of free trade, however, this competition not only involves granting tax concessions, infrastructure, and the availability of a skilled workforce, it also complicates trade agreement rules. What’s revealed is an uneven field of power relations, shaped by the history of foreign relations and corporate power in each country. 

Efforts to “re-nationalize” elements of car production demonstrate how the automotive sector negotiates local, national, and global interests—policies aiming to support labor in one country implicate labor and corporate interests in another. Still, there are continuities between the origins of Mexico’s automotive sector and its current state. The Mexican government’s manufacturing-centric growth model, reliance on corporate investment, and divestment from social services have enabled the precaritization increasingly prevalent in the sector today.

At the same time, a strengthened labor force—as evidenced by recent victories of independent unions—may suggest a potential new direction. USMCA’s chapter 23, along with new labor reforms in Mexico requiring direct union elections and public contracts, have allowed Mexican workers to challenge corrupt unions. Although it remains to be seen how different national interests can be reconciled, shifts in labor legislation across levels of governance are hopeful signs of emerging possibilities in labor unionism.

  1. With this proposal, Biden laid down the path to achieve three goals of his now stalled “Build Back Better” agenda: 1) promote a carbon pollution-free power sector by 2035, 2) create jobs with labor protections, and 3) strengthen the US auto industry with technology invented in America.

  2. Since the 1920s, Mexico had assembled Ford and General Motors cars, initially manufactured in Detroit and exported as completely-knocked-down (CKD) kits. Jorge Acevedo Martínez and Armando Heredia González, “Historia de la Ford Motor Company de Mexico, SA de CV.” In La Cultura Industrial Mexicana. Sergio Niccolai and Humberto Morales (eds.). Pp. 387-397 (Puebla: Benemérita Universidad Autónoma de Puebla, 2003).

  3. For a detailed account and analysis of the policies that shaped the Mexican automotive industry during the ISI era, see Douglas C. Bennett and Kenneth Evan Sharpe, Transnational Corporation versus the State: The Political Economy of the Mexican Auto-Industry (Princeton, NJ: Princeton University Press, 1985). See also Rhys Owen Jenkins, Dependent Industrialization in Latin America: The Automotive Industry in Argentina, Chile, and Mexico (New York: Praeger, 1977).

  4. Edur Velasco Arregui, “Industrial Restructuring in Mexico During the 1980s.” In The Political Economy of North American Free Trade. Ricardo Grinspun and Maxwell A. Cameron (eds.). Pp. 163-175 (Montreal & Kingston: McGill-Queen University Press, 1993).

  5. Manlio Barbosa Cano, “El decreto expropiatorio de las tierras de Ocotlán es contrario al interes público.” Crítica Revista de la Universidad Autonóma de Puebla (1984,21:55-65) and Elsa Patino Tovar, “Periferia Poblana: la desigualdad del crecimiento.” Papeles de Población, Universidad Autonóma del Estado de México (2004 10(2): 125-151).

  6. Douglas C. Bennett and Kenneth Evan Sharpe, Transnational Corporation versus the State: The Political Economy of the Mexican Auto-Industry (Princeton, NJ: Princeton University Press, 1985).

  7. Subcontracted workers employed in both sectors were, until 2021, excluded from these legal entitlements granted in Mexico’s labor code. See Alejandra González Jiménez, “Mexico’s Labor Reform May not be Enough for Auto Logistics Workers.”

  8. Ian Roxborough, Unions and Politics of Mexico. The Case of the Automobile Industry (Cambridge: Cambridge University Press.

  9. Joseph U. Lenti, Redeeming the Revolution (Lincoln: University of Nebraska Press 2017).

  10. These jobs mostly targeted a female workforce. See more on the gendered dimension of maquiladora manufacturing sector: Norma Iglesias Prieto, Beautiful Flowers of the Maquiladora (Austin: University of Texas Press 1997) and Patricia Fernández-Kelly, For We are Sold, I and my People: Women and Industry in Mexico’s Frontier (Albany: State University Press, 1983).

  11. Teresa Healy, Gendered Struggles Against Globalisation in Mexico (Aldershot: Ashgate 2008).

  12. Deborah Cowen, The Deadly Life of Logistics: Mapping the Violence of Global Trade. Minneapolis: University of Minnesota Press 2014).

  13. Kevin Middlebrook, “Union Democratization in the Mexican Automobile Industry: A Reappraisal.” Latin American Research Review, 1989 24(2):69-93.

  14. These practices are also found in the US and Canada.

  15. Using this clause, corporations sue countries for passing environmental protections under the argument that these disrupt their operations, current investments, and undermine their expected future profits. For more on corporate power see Joshua Barkan, Corporate Sovereignty: Law and Government under Capitalism (Minneapolis: University of Minnesota Press, 2013) and Dinah Rajak, In Good Company: An Anatomy of Corporate Social Responsibility (Stanford: University of California Press, 2011).

  16. In 2007, the then Mexican President Felipe Calderón Hinojosa created ProMéxico, a subdivision of the Secretariat of Economy, to promote investments in Mexico.

  17. For an example of cross-border solidarities among Mexican, Canadian, and US autoworkers see “$ 4 a Day? No Way! Joining Hands Across the Border.

  18. To address labor requirements under UMSCA, Mexico legally ended the practice of subcontracting in 2021. Subcontracting, a mechanism through which a third-party provides personnel, had become a common form of employment in Mexico. In the area of car production, the 2021 subcontracting bill will have an effect in the area of auto-parts manufacturing but not in the area of logistics services, as the delivery of auto-parts (along with janitorial and cafeteria services) is not considered the core of car production.

  19. Nevertheless, United Autoworkers (UAW) Vice President Terry reacted to GM’s EV investment in Mexico by describing it as a “slap in the face for not only UAW members and their families but also for US taxpayers and the American workforce.”

  20. To address this concern, the Mexican government has promised to respect the contract of UK’s Bacanora Lithium in partnership with China’s Ganfeng Lithium, with the stipulation that the concession is in active use, not just for speculation.

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