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CBP Rejected 27% of Auto Parts Seeking USMCA Benefits in Audits; 20% Not Seeking Benefit

Changes to the USMCA rules of origin (ROOs) have "had a positive economic impact on the U.S. and North American auto industry, although with some challenges in implementation and new challenges emerging," according to the Office of the U.S. Trade Representative. The USTR report to Congress, mandated by Congress when NAFTA was rewritten, noted that carmakers "are still adjusting to the full scope of USMCA’s autos rules," with 13 entities given extended time to meet the stricter rules, at least for some models.

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Tesla, Kia in Georgia and Mexico, Honda, Toyota, Mazda, Nissan, Hyundai, Volkswagen, Volvo, Ford, Stellantis and a Mexican plant that's a Nissan-Mercedes joint venture all have alternative staging regimes and are meeting their transition requirements. Four asked for modifications to the regime. The report said carmakers that make electric vehicles are seeking more time to source U.S.-made battery cells. In 2025, only battery packs with North American cells will allow a car or truck to qualify for USMCA duty benefits.

To support its argument that the change of rules of origin has had a positive impact, the agency cited an International Trade Commission report last year said there has been a decrease in imports of engines and transmissions from outside the USMCA region, and U.S. producers of engines and transmissions added 3,877 workers, and increased sales by $1.6 billion. The same estimate said it didn't drive significant hiring at assembly plants; they only increased employment by 35 workers, though profits increased $25 million.

Progressive Policy Institute Director for Trade Ed Gresser, a former assistant USTR for trade policy and economics, said in a telephone interview that a net gain of 3,900 jobs in the auto parts sector "is good -- but it's not astonishing." He said there are about 600,000 U.S. auto-parts workers, and employment figures fluctuate month to month by 1,000 to 5,000.

Over time, he said, the parts sector has shrunk -- it accounted for about 587,000 jobs in April, down from 600,000 in April 2019 -- while assembly plant jobs have grown. Those jobs were at 286,000 in April 2019, and now are at 302,000.

The report acknowledged that the proportion of vehicles and parts imported from Canada and Mexico not claiming duty-free status has "increased significantly" since 2020, when NAFTA was replaced. In 2023, 8.2% of vehicles didn't claim USMCA tariff benefits; the report said 90% of those were imported under subheading 8703.23 (vehicles for the transport of persons with a spark-ignition engine with a cylinder capacity greater than 1.5L but less than 3L) from Mexico.

For parts, in 2019, the last full year NAFTA applied, 9.3% paid duties; in 2023, it was 20.5%. Bodies, engines, steering assemblies and wiring sets were the most common parts that entered without claiming USMCA benefits; $16.1 million worth of parts paid duty in 2023.

"The USTR did a professional job in summarizing all of these things, and not dropping out the things that don’t look as good for their report," Gresser said. He said he thinks it's more likely that more cars will be imported without meeting USMCA rules of origin after the extended staging regimes are over.

Even though CBP started applying USMCA rules to the auto sector in June 2021, it still has not issued its final set of regulations, the report noted. Those regulations, which are guidance for the automotive industry, are pending interagency review.

CBP has verified 652 shipments from June 2021 through the first quarter of 2024, the report said, of either auto parts, auto components or used vehicles, covering $48.6 million worth of goods; 27% of the time it rejected the claims, either due to regional value content non-compliance, insufficient documentation, or non-response.

"That’s quite a lot for an industry that is so focused on this issue, and it could indicate some problem with the way CBP is operating," Gresser said. "Maybe they’re not explaining this enough."

But, he added, given that guidance to the sector hasn't been fully released, in that case, "it’s not surprising they’re not totally satisfied with what they’re getting."

The report said that for new vehicles, the first four vehicle verification audits were done in May that cover steel and aluminum purchase requirements. All concluded the metals requirements were met. The first two vehicle verification audits that cover labor value content are still underway.

The Mexican and Canadian auto industries, and the foreign nameplate automakers that build cars in North America, argue that the U.S.'s post-signing interpretation of how core parts can qualify makes it more likely that companies will give up on trying to qualify for duty benefits.

Under the new rules of origin, even a car that meets the overall content requirement can't get the benefit unless "super core" parts are 75% North American. Those categories include the engine, transmission, body, steering system, axle, suspension, and for electric vehicles, the battery. Under NAFTA, if those parts qualified under their own rule of origin, their full value would count toward the overall regional value content, a process known as roll-up.

The U.S. said it would no longer accept the roll-up methodology, but lost the case in front of a USMCA panel. About two-thirds of the way through the report, the agency addressed the dispute. It acknowledged it lost, and said it is consulting about how to resolve the dispute, but has not agreed with Mexico and Canada.

"The United States has explained that a resolution should benefit all the USMCA Parties and their shared goal to enhance North American production and employment. However, data adduced during the panel proceeding (including confidential data from automakers) suggests that the Mexican and Canadian interpretation could result in well over 10 or even 20 percent less North American content per vehicle than the U.S. interpretation, undermining a key USMCA goal," the report said.

The agency acknowledged that some say if the U.S. doesn't comply with the panel, it will undermine the treaty's dispute settlement mechanism. It also acknowledged that while GM, Ford and Stellantis haven't taken a position on how the U.S. should respond to the dispute panel ruling, it does want a resolution promptly, because that would "bring greater certainty and predictability to the North American automotive supply chain." Labor unions, the report noted, do not want the U.S. to implement the panel ruling.

The agency asked for comments before writing this report, and received 47 comments, along with oral testimony from four witnesses.

"Stakeholders have expressed a desire for more information and transparency around the USMCA ROOs and how they are enforced. Automotive suppliers report that the complexity of the ROOs continues to impose administrative burdens on suppliers, and evidence suggests that suppliers are not attempting to claim USMCA preference for a growing share of automotive parts trade," the report said. Labor unions said they were concerned there hasn't been transparency on the enforcement of the rules of origin, including labor value requirements, and that makes it "difficult for stakeholders to assess the efficacy of those provisions."

The agency said it would work closely with stakeholders to address the administrative burdens for parts producers, given that rules of origin differ depending on whether it's destined for a passenger vehicle, a heavy truck, or is going to be an aftermarket part, and given the lack of standardization in certification forms after CBP stopped requiring a specific format.

"At the same time, we will work with labor and other stakeholders to increase transparency regarding the enforcement of the rules of origin," it said.

The report briefly touched on the issue of Chinese overcapacity in electric vehicles, and the possibility that it could use Mexico as a manufacturing platform. "Even when the [People's Republic of China] invests outside its own borders, including to take advantage of others’ preferential trade arrangements, it appears that the PRC’s investment and labor practices are not designed to benefit workers in the host country," it said. It also said that Canada's and Mexico's trade ministers and the USTR agreed in May to expand their collaboration "on issues related to non-market policies and practices of other countries, which undermine the Agreement and harm U.S., Canadian, and Mexican workers, including in the automotive and other sectors."

The report noted that used vehicle importers asked for relief, because those cars, trucks and buses are paying duties since they cannot document regional value content, labor value content and North American steel and aluminum in them. The report said that while used vehicles that were made in the U.S. and are being imported within three years of their export can enter under 9801.00.10, overall, "Since the USMCA superseded the NAFTA’s automotive rules of origin on July 1, 2020 and because USMCA’s rules do not differentiate between new and used vehicles, the United States is unable to extend unilateral duty-free treatment to used vehicles at this time."

Gresser said if these interests can get congressional attention, it's possible a fix could ride with other trade legislation, such as the African Growth and Opportunity Act and Generalized System of Preferences benefits program. "Used car sales don’t have a lot of production job impact," he said, so it might be something members would be willing to change in the law.