USMCA Adds Complexity to Automotive Rules of Origin, Experts Say
The United States-Mexico-Canada Agreement contains the most complex automotive rules of origin of any trade deal, significantly raising rule requirements for the industry and steeply increasing costs for compliance programs, several experts said at an April 4 Center for Strategic and International Studies panel. Several industry leaders said the USMCA will force many companies in the automotive supply chain to make substantial changes. “The USMCA rule of origin is now by far the most complex, stringent requirement that exists in any free trade agreement in the world,” said Matt Blunt, president of the American Automotive Policy Council. “It really will force manufacturers to think more about the rule of origin and their sourcing decisions than they’ve ever done before.”
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Jack Caporal, an associate fellow with CSIS, co-authored a report on the impact of the USMCA’s rules of origin on the car industry, saying although the deal will lead to increased long-term American investment, the transition period may be complicated. “For a lot of companies, the original NAFTA rule of origin was not something they paid a lot of attention to because it just wasn't very difficult to meet,” Caporal said during the panel. “The complexity and the added layers of the USMCA rules of origin will require folks to take a second look.”
Caporal outlined the three main differences between NAFTA’s automotive rules of origin and those in USMCA: an increase in the percentage of the car that must be made within the USMCA region, an increase in the percentage of specific car parts that must originate in the region, and a wage requirement for workers in the supply chain, which may force some companies to move their operations out of Mexico and into the U.S. or Canada.
Under NAFTA, Caporal said, cars are required to have a regional value content (RVC) of 62.5 percent -- meaning that roughly five-eighths of the car has to originate within the NAFTA region. In addition, Caporal said, certain car parts are required to have a 60 percent RVC. But under USMCA, those numbers increase: 75 percent of the car must originate within the region, Caporal said, while 65 percent to 75 percent of certain parts must be made in the USMCA region, depending on the parts.
The final main rule, Caporal said, established a wage requirement: Between 40 percent and 45 percent of the vehicle’s parts must be made by workers earning at least $16 an hour. The wage rules may require that most of a car’s parts come from either the U.S. or Canada because of the lower wages in Mexico, according to the CSIS report. The report said it will be “difficult” for automakers to satisfy both the rules of origin and labor wage requirements if their production takes place in Mexico.
While Caporal said the auto industry is “still working through” how the rules will affect their companies, many expect the deal to increase investment in the U.S. in the long term. But he also warned of the danger of rules of origin being “too complex and too restrictive.” The new rules will likely hurt small to medium-sized companies that fill a niche gap in the supply chain and employ relatively small staffs, Caporal said. “Your firm might just lack the knowledge … to ensure compliance,” he said. “And that can lead to unintended or unexpected costs.” The rules may also hurt foreign auto companies with production centers in Mexico, Caporal said -- naming Volvo, Mazda, Hyundai and BMW -- that will have to review labor wages.
Blunt said many auto companies will have to make “significant investments to meet the USMCA rules of origin.” Blunt, who represents Fiat Chrysler Automobiles, Ford Motor Company and General Motors Company, said all three recently announced large investments in the U.S., adding that each “cited the USMCA rules of origin as an important reason to justify that investment.” Blunt said the AAPC has endorsed the USMCA. “It’s going to be demanding and challenging … no one should underestimate how it’s going to change the supply chain and change some of their sourcing decisions,” Blunt said. “But our member companies think they can live with it.”
Phillip Sherman, the international trade manager for Daimler North America, agreed. “Costs are going to be significant,” he said during the panel. “It's going to be a really heavy lift to just get the compliance where it needs to be, where it’s not such a burden on the overall value of the vehicle.” If the USMCA is implemented, Caporal said more free trade agreements will adopt similarly complex rules of origin in hopes of spurring domestic production and investment. “I think you're likely to see continued innovation in this space,” he said. “It's certainly not going away.”