Investment in the steel industry in Mexico: challenges for the automotive industry before the USMCA and China

Type de publication:

Conference Paper


Gerpisa colloquium, Paris (2020)


Automotive industry, China, investment, rules of origin, steel industry, trade, USMCA



Investment in the steel industry in Mexico: challenges for the automotive industry before the USMCA and China<!--[if !supportFootnotes]-->[1]<!--[endif]-->

Samuel Ortiz Velásquez

Aurora Marcial Flores


Iron and steel are two essential inputs in almost all investments in fixed capital. Given the strategic nature of the steel industry (e.g., its vertical integration backwards and forwards), historically all governments have given it a central role in their industrialization strategies. Today, the steel industry is a matter of national security in the United States, while it has supported the accelerated modernization process in China. It can well be said that the recent global readjustments manifested in the China-United States trade tensions and the new United States-Mexico-Canada treaty (USMCA) seek, in part, to promote a greater use of the steel and aluminum products produced in North America.

The document offers a discussion of the investment conditions and challenges for the steel and automotive industry in Mexico, before the ratification of the USMCA and the China phenomenon. The document is structured in five sections. Section one contains the characteristics of the world steel industry, with an emphasis on China and the United States. Such diagnoses allow us to understand the rationale of the USMCA rules of origin for the automotive industry. Indeed, the USMCA contains new regional content value provisions for certain sectors, with the intention of encouraging greater use of steel and aluminum products produced in North America. The sectors affected include automotive products, certain manufactured steel products and steel-intensive products. Chapter 4 of the USMCA introduces new specific rules of origin for automotive products, which seek to increase the degrees of local integration in the auto-automotive industry. Article 4-b.6. indicates that “A passenger vehicle, light truck, or heavy truck, is originating only if, in the previous year, at least 70 percent of a) the vehicle producer purchases of steel in North America and, b) the vehicle producer’s purchases of aluminum in North America, are originating.” Such requirement does not identify the relevant classifications of the harmonized system of tariff categories, instead the USMCA indicates that the parties "will seek to develop any additional description or other modification to steel and aluminum ..., to facilitate the implementation of this requirement" (SE, 2020b).

Starting from the understanding of global phenomena, in section three the conditions and challenges for investment in the steel industry in Mexico before the USMCA and China are discussed: first its industrial organization is discussed, then a conceptual synoptic discussion is introduced on the determinants of foreign direct investment (FDI) with international empirical evidence, considering that it is a capital-intensive, large-scale industry and operates in a concentrated market with a significant participation of foreign capital. The section concludes with the discussion of three case studies: Tenaris-Tamsa, Ternium and Gerdau-Corsa which give an account of the opinion and strategies of the companies regarding investment before the USMCA and China. The last section is devoted to the conclusions.

The main conclusions include:

1.- The presence in Mexico of the foreign subsidiaries GC and TT is due to a combination of macroeconomic, institutional, microeconomic and location factors.

2.- The steel industry is global and therefore has been affected by Chinese imports and the triangulations of trade carried out by its companies. In this regard, the steel industry in China receives strong state incentives that impact costs, e.g., in Mexico all steel industries pay 100% of employer contributions to social security, while Chinese firms pay the minimum; access to financing in Mexico occurs under market criteria, while in China financing for companies is governed by non-economic criteria; for many years the devaluation of the yuan was a factor of competitiveness for the steel industry in China. All the above points to China being a threat to investment in the steel companies operating in Mexico, due to the impossibility of competing in costs. Due to the impossibility of competing on prices with these countries, GC's strategy, for example, to remain in the market in the face of the "Chinese threat" is based on logistical advantages, linked to delivery times, cost of waiting and quality. On the other hand, Tenaris is committed to a standardization strategy for knowledge and investments in human resources through its Corporate University.

3.- The NAFTA institution motivated companies to diversify their production and expand the market, which allows understanding the growing forward vertical integration of Tenaris-Tamsa towards activities of greater added value, e.g., the commissioning of the automotive component center and sucker rod factory.

4.- Steel products are essential in all investments in fixed capital and durable consumer goods, which is why the steel industry depends heavily on construction and heavy industry. This means that the industry is very sensitive to changes in the world and in the territory where it operates. Thus, it is understood that the growing trade tensions between the United States-China and the USMCA may boost investments in the Mexican steel industry. In the interviews, it was pointed out that some American companies that previously bought steel from China, today see Mexico as an option. On the other hand, the new regional content value provisions in the USMCA are intended to encourage greater use of steel and aluminum products produced in North America, this may be positive for the steel industry in North America and for Gerdau Group companies that have plants in Mexico, the United States and Canada. However, doubts are also raised about regional competitiveness.

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<!--[if !supportFootnotes]-->[1]<!--[endif]--> Research carried out thanks to the UNAM-PAPIIT Program IA303118 "The Mexican productive apparatus at the dawn of the 21st century: between trade integration with the United States and China, and national disintegration."

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