USMCA Expert Says Auto Industry Will Be Burdened With USTR Interpretation of Roll-Up Provisions
The auto industry will begin to comply with USMCA's auto rules of origin soon, but one of the biggest questions on regional value content continues to be contested. Dan Ujczo, a senior counsel for Thompson Hine's international trade practice and a USMCA expert, said summary reports from USMCA committees show that Mexican, Canadian and U.S. officials were unable to agree on how regional content should be calculated.
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Ujczo told International Trade Today the auto industry initially was concerned that the Office of the U.S. Trade Representative was arguing that for the vehicle regional value standard, every bit of non-North American content would count against the tally.
In NAFTA, as parts qualify as Mexican or American or Canadian, the non-local content is ignored, and the value of the part counts toward the vehicle figure. So, for instance, if a Mexican steering column is 75% Mexican by value, the entire steering column's value contributes to the vehicle's North American content.
But Ujczo said that USTR is now saying it's not going to be that strict on all parts, just on core parts, "and presumably supercore" parts. Automakers were given a generous amount of flexibility for their phase-in plans, Ujczo said, which cover Cooperation Manufacturing Plant Aguascalientes (COMPAS) (Daimler and Nissan), Fiat Chrysler, Ford, Honda, Hyundai, Kia in both Georgia and Mexico, Mazda, Nissan, Tesla, Toyota, Volkswagen and Volvo.
But after the five years allowed for that "alternative staging," which ends June 30, 2025, the vehicles must be 75% North American to avoid the 2.5% tariff on autos or the 25% tariff on light trucks.
In July 2021, they will need to be at 66%, and Ujczo said the companies are prepared for that. It's what happens in two to three years that they're troubled by.
Ujczo argues that the 75% North American rule, which will come four years from now, cannot be met unless the U.S. backs down on its position that originating core parts do not contribute 100% to the vehicle's North American content, that only the North American content from those parts will be counted. Moreover, he believes a 75% standard on engines can't be met without allowing roll-up on the assemblies.
He said the Mexican and Canadian auto parts industries are arguing that this was not what they understood when the three countries were negotiating the NAFTA rewrite. Mexican Economy Minister Tatiana Clouthier told Inside U.S. Trade in May, "We have a different understanding regarding certain automotive provisions related to rules of origin." She said Mexico is arguing that more flexibility in the calculations will lead to more North American part production, not less.
USTR did not respond to detailed questions about this issue.
Ujczo said it's not just the major automakers that are concerned, so are the large Tier 1 suppliers, such as Magna. He said power train assemblies are of most concern, as electronics usually come from Asia, so electrical steering systems and transmissions, even if they have enough North American value to originate, will have significant foreign content.
He said the rigidity the USTR is arguing for is especially concerning for when the auto industry moves toward electric vehicles and autonomous vehicles, since there are not well-developed supply chains locally for lithium ion batteries, for instance.
"The rules of origin were carefully crafted with the idea that roll-up will apply to core parts," he said. "At some point something’s going to have to give."
"To my knowledge, and we’re pretty damn close to this issue, it wasn’t that we’re going to agree to disagree and deal with it later," he said of the question of "roll-up." He said there were conflicting views within government agencies on how to calculate the value, and Canada and Mexico were blindsided. He acknowledged it is amazing that this issue was not covered in writing.
He said that automakers made sourcing decisions a year or two ago that could lead to not qualifying for the tariff benefit in four years. "It’s really pulling the rug out from under those sourcing decisions," he said.
He said there is capacity to move more production from Asia to Mexico, but it takes about 18 months to two years to move parts production elsewhere. "Where do I get the tooling from? It’s all subject to 25% tariffs. Getting it made in China right now and getting it shipped here" is a hurdle. "Are we going to find a ship to bring it over?"
He said that if all three countries come to agree that there will be no roll-up on core parts, the auto industry can adjust. "It is going to be extremely challenging," he said. But currently, the auto industries are not spending the time and money to do that, because Canada and Mexico are saying that's not what they agreed to.
"I think there’ll be a work out," he said. "My understanding is that there will be discussions throughout the summer and the fall." He's pleased the committees are finally up and running.