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TRENDS IN AUTOMOTIVE

REGULATED: What the Auto Industry Needs to Know about USMCA

So, Just What is the USMCA?

The U.S.-Mexico-Canada Agreement (USMCA) rewrites the North American Free Trade Agreement (NAFTA), which for 26 years defined how $1.2 trillion in trade was conducted among the three countries.

USMCA replaced NAFTA on July 1. While participating traders are expected to comply with its requirements as of that date, they have until the end of 2020 to certify their initial efforts and until July 1, 2023, to become 100% compliant.

For some industries, the changes from NAFTA to USMCA are relatively minor. Not so for the auto industry.

“This is a massive change to a trade agreement that defined how we built our operations in Canada, Mexico and the U.S.,” notes Ann Wilson, who heads government affairs for the Motor & Equipment Manufacturers Association (MEMA) and its Original Equipment Suppliers Association (OESA) affiliate.

The office of the U.S. Trade Representative calculates that USMCA will give the U.S. $34 billion in new investment, $23 billion in additional annual parts purchases and 76,000 new auto sector jobs by the end of 2025.

For some industries, the changes from NAFTA to USMCA are relatively minor. Not so for the auto industry.

Local Content Levels

There are several issues that suppliers should be addressing now to make sure they meet compliancy standards by the beginning of 2021, starting with local content levels.

NAFTA required completely assembled vehicles to have at least 62.5% of their value sourced within Canada, Mexico or the U.S. Under USMCA, that ratio rises to 75% for passenger vehicles and light trucks.

But step one is to clarify whether a given component is “core,” “principal” or “complementary.” Those terms were used in NAFTA. But determining where parts fit under the new pact isn’t necessarily a simple process, because many components found in today’s cars didn’t even exist when NAFTA was written in 1994.

Under USMCA, each category has its own “regional value content” threshold:

  • 75% for core (such as engines, transmissions, axles)
  • 70% for principal (tires, glass, pumps, brake parts)
  • 65% for complementary (interior trim, instrument panels, catalytic converters)

The 75% content requirement makes the local content of core components a primary concern for OEMs. For suppliers of complementary products, USMCA provisions about locally sourced steel and aluminum may be a bigger issue.

Wages of at Least $16 per Hour

USMCA dictates that 40% of passenger cars and 45% of light trucks must be produced in North American facilities where workers earn an average of at least $16 per hour.

This rule aims to retain or encourage the production of high-value core components in the U.S. But it also raises the question among producers of core components in Mexico whether it would be more cost effective to raise wages there or move production to the U.S. or Canada.

During the initial phase, it’s important for companies throughout the supply chain to understand how their components might be affected by the $16 rule. OEMs may require certain tier one suppliers to certify that their affected facilities meet the $16 average, for example. But sub-tier suppliers may be asked to participate in these calculations.

 

 

It raises the question among producers of core components in Mexico whether it would be more cost effective to raise wages there or move production to the U.S. or Canada.

No More Cross-Border Fee Refunds

Under NAFTA, parts makers paid a merchandise processing fee—similar to a tariff—to move products across borders. But if the affected components were compliant, the fee was refunded.

This provision is not a part of USMCA, apparently because of an oversight, MEMA’s Wilson says. She says the cost to suppliers is significant, and MEMA is working with Congress to address the issue.

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