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USMCA: Implications for the automotive sector

October 5, 2018 / 6 min read

Following last minute negotiations, we have a proposed NAFTA replacement: The United States, Mexico and Canada Agreement (USMCA). What’s in it for the auto sector? In this article we look at implications for the supply chain, regional content, and labor.

The Trump Administration announced a new three-way trade agreement with Canada and Mexico this week. The agreement — called The United States, Mexico and Canada Agreement (USMCA) — will, once ratified, replace the North American Free Trade Agreement (NAFTA) as we know it.

As with NAFTA, the USMCA is a broad, encompassing agreement covering manufacturing, agriculture/dairy, financial services, telecommunications, and other sectors. In addition to the trade of physical goods, it addresses intellectual property, labor markets, anti-competitive practices, and the environment. This article focuses on the implications of USMCA to the automotive sector.

Three major takeaways for automotive suppliers

The USMCA has three important provisions of interest to the automotive sector. You can find them in the Appendix to Annex 4-B, “Provisions Related to the Product-specific Rules of Origin for Automotive Goods.”

The Annex 4-B provisions cover the important areas of domestic content, steel and aluminum content requirements, and labor wage provisions. Additionally, they spell out the different handling for passenger cars, light trucks, heavy-duty vehicles, and automotive parts.

We’ve identified three important takeaways for automotive suppliers:

1. Grow-in periods allow OEM and supplier-sourcing strategies to play out.

The USMCA provides for “grow-in” periods to allow time for OEMs and suppliers to review sourcing strategies. Under these provisions, most content percentages and other provisions generally will be effective in 2023. This means that OEMs and suppliers will have five years to adjust the supply chain underneath existing vehicles and new vehicle introductions. However, these more complex reporting requirements will lead to greater company compliance costs.

OEMs will have five years to adjust the supply chain underneath existing vehicles and new vehicle introductions.

These higher regional content values lead to several anticipated adjustments:

The following are the basic grow-in periods for each of the key areas:

2. Core, principal, and complementary will become the common vocabulary describing parts.

The Annex 4-B vehicle regional value content requirements have three tables with specific parts codes defining regional value content requirements and grow-in periods to be declared originating in the North American region:

3. Be cautious regarding potential, future automotive tariffs.

We’re urging caution regarding the potential for future automotive tariffs under Section 232 of the Trade Expansion Act of 1962. Previously, we covered the May 23 announcement that the United States was initiating a Section 232 investigation to determine whether automobile and automotive part imports threaten to impair U.S. national security. Now, the proposed USMCA contains language that shields Canada and Mexico from potential automotive vehicle and parts tariffs should the United States conclude that foreign vehicle and part imports are a threat to national security.

We’re urging caution regarding the potential for future automotive tariffs under Section 232 of the Trade Expansion Act of 1962.

The agreement has four side letters that cover the exclusion of Mexico and Canada from automotive Section 232 tariffs and establishes a 60-day negotiation period to work out the details of how vehicles and parts could flow under an established quota system. The fact that the three countries chose to explicitly handle this issue through side letter agreements clearly shows the potential for future automotive Section 232 tariffs. It also has potential implications for the negotiating strategy between the United States, Japan, South Korea, and the European Union.

We also note that the USMCA doesn’t change the steel (25 percent) and aluminum (10 percent) Section 232 tariffs currently in effect.

What next?

Given that the majority of all timelines written into the USMCA begin Jan. 1, 2020, there’s a general perception that the United States, Canada, and Mexico will live under the current NAFTA agreement through 2019.

In the meantime, the U.S. International Trade Commission is required to issue an economic impact analysis, and the U.S. Senate Finance Committee and the U.S. House Ways and Means Committee should hold public hearings and report out on the final text. It’s unlikely these items will go forward before the next session of Congress convenes in 2019.

Since the USMCA is being put forward under the Trade Promotion Act, Congress cannot amend the text that is presented to them. The Senate will vote the agreement up or down with a majority of votes.

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