The U.S. interpretation of vehicle-content rules under the United States-MexicoCanada Agreement (USMCA) could make it too complicated for automakers to comply, say industry stakeholders. The result is that they might simply turn to low cost overseas jurisdictions for parts and pay a tariff penalty rather that use regional suppliers.

Trilateral consultations launched in August failed to resolve the dispute over the U.S. interpretation of rules that require 75 per cent of a vehicle’s contents be made in the three countries to avoid tariffs, Lama Khodr of Global Affairs Canada said Nov. 5.

“Canada will continue to closely monitor developments and is considering next steps.”

At issue is how the United States is calculating regional value content (RVC) on core parts — including engines, transmissions and suspension systems — and how they should count toward the vehicle’s RVC once they are built into the car or truck.

The auto industry, Canada and Mexico have interpreted the rules to mean that if a smaller component that meets its content requirements is incorporated into a larger part or vehicle, then it can count as 100 per cent originating from within North America when determining the larger part or vehicle’s RVC.

But as Automotive News Canada reported in March, the United States has interpreted the rules to mean that only the part’s RVC can be counted toward the larger component or vehicle’s RVC. For instance, if 75 per cent of a part originates from within the three member countries, then only 75 per cent of it can count toward the larger part’s RVC, according to the United States.

That interpretation led Luz Maria de la Mora, Mexico’s undersecretary of economy for foreign trade, to say in August that if the United States does not come to an agreement about those rules, companies could seek to move their business to countries with more favourable trade deals.

“USMCA may become inconsequential for trade in the auto sector in North America because companies may decide not to bother with even complying with USMCA because it becomes so costly, so cumbersome and so difficult,” De la Mora told Bloomberg. “It may not be worth their effort to really try to procure from North America, so why bother investing in North America?”

JUST PAY THE TARIFF?

Under the USMCA, noncompliant passenger vehicles are subject to a 2.5 per cent tariff.

Companies will “turn around and say, ‘What’s the penalty? It’s 2.5 per cent,’” said Flavio Volpe, president of the Automotive Parts Manufacturers’ Association (APMA). “ ‘Well, how do I make up that 2.5 per cent? I guess it’s a zero-sum game. You either get to 75 per cent or you don’t.

“ ‘So, can I source from overseas or lower-cost jurisdictions? Maybe my local content comes down to 60 per cent or 50 per cent to make up for that penalty.’ ”

That assessment is echoed by Kristin Dziczek, senior vice-president of research at the Center for Automotive Research in Michigan.

“One of my initial fears a long time ago was that if you set the rules too high or too stringent, then companies will just say, ‘OK, 2.5 per cent is cheaper than complying with that.’ ”

It would be a tall order for automakers to decide to move production of vehicles geared toward
the United States out of North America, said Dziczek. Instead, North American suppliers could lose out if automakers decide to source parts elsewhere.

“It’s going to make it much more difficult to land things in North America for those suppliers and automakers that decide the USMCA’s rules are too stringent,” she said.

TOUGHER STANCE

David Adams, CEO of the Global Automakers of Canada (GAC), which lobbies for the interests of import automakers, said now that consultations have failed, Mexico could seek arbitration through a panel of experts. An Oct. 26 story from Reuters news service indicated that process was under way, but Automotive News Canada could not confirm this.

Brian Kingston, CEO of the Canadian Vehicle Manufacturers’ Association, which represents the Detroit Three in Canada, said it was important to make sure the USMCA is “implemented correctly.”

“The competitiveness of this industry depends on the fact that we can move products efficiently and effectively across all three markets,” he said.

Many in the industry think the U.S. government is “being harder now than they intend to be long term,” Volpe said, adding that political and economic dynamics could change the Biden administration’s stance over time.

Parts makers in the United States could stand to be especially hurt by the U.S. stance, Volpe said. Those companies supply 50 per cent of parts to Canadian assembly plants, he said.

“I think the midterm U.S. election [in 2022] is the first moment where this administration may have to justify an action that’s going to hurt the American auto sector,” Volpe said.

“Putting Canada’s and Mexico’s interests aside, if you’re going to make it harder for manufacturers to assemble a vehicle that’s compliant with USCMA rules, you’re largely hurting American manufacturers in the other two countries.”