Carmakers get delay, more time to meet NAFTA successor's rules amid pandemic
Washington — With assembly lines halted and auto sales in free fall, the replacement for the North American Free Trade Agreement will take effect July 1, one month later than its original start date, the federal government said Friday.
In another nod to the impact of the COVID-19 pandemic on automakers that have been asking for a delay, the government will give them at least an additional two years to meet the requirements: now five years instead of three.
The United States Mexico Canada Agreement, signed into law by President Donald Trump in January, requires automakers to produce cars with 75% of parts originating from the United States, Canada or Mexico — up from 62.5% — to qualify for duty-free treatment.
United States Trade Representative Robert Lighthizer on Friday framed the implementation of the USMCA as a major step in the nation's effort to rebound from the economic free fall that the pandemic has wrought.
“The crisis and recovery from the COVID-19 pandemic demonstrates that now, more than ever, the United States should strive to increase manufacturing capacity and investment in North America," he said in a statement. "The USMCA’s entry into force is a landmark achievement in that effort."
In addition to the USMCA's new requirements for parts, known as "rules of origin," the new pact requires 40-45% of an auto’s content to be made by workers earning at least $16 per hour. Vehicles not meeting the requirements will be subject to a 2.5% duty.
John Bozzella, president and CEO of the Alliance for Automotive Innovation, which lobbies for carmakers in Washington, said it would be difficult for automakers to make changes to their supply chains to begin satisfying new rules with production shut down and uncertainty surrounding potential restart dates.
"The idea is it's important for companies to have clarity and flexibility to make the transition in a very, very challenging environment," he said. "We're suffering through a complete suspension of production and a demand shock at the same time. Sales are down 50% over the past few weeks.
"Even the sales that are happening are heavily incentivized sales. In other words, manufacturers are spending a lot just to get to this level of sales."
Bozzella noted the auto industry is not pushing for the federal government to abandon the higher threshold for North American parts altogether.
"The USMCA is an important agreement we certainly think will increase investment and employment in North America," he said. "It's going to require additional investments and transitions in a COVID-19 environment when manufacturers effectively have to be mindful of their finances. The overall goals of the USMCA will still be met with a managed transition."
The delay to auto rules under the new trade pact is one of few requests for assistance from automakers during the pandemic that the federal government has granted.
Detroit’s automakers have been walking a fine line: Although they have been hit hard by the coronavirus crisis, they are wary of appearing to ask for handouts a decade after the federal government was forced to bail out General Motors and Chrysler.
Before Congress approved its massive aid package in March, automakers had lobbied for loan guarantees, deferred corporate tax payments and tax deductions for paid leaves to employees.
Lawmakers largely ignored the requests while granting financial assistance to hospitals and airlines in a $2.2 trillion coronavirus relief bill that was passed in March.
Prior to releasing the updated guidance for USMCA compliance, the federal government recommended that auto sales be deemed essential during the coronavirus pandemic, granting a previous request from automakers.
The decisions have been left up to governors as states, including Michigan, prepare protocols to begin reopening state economies essentially shut down to battle the coronavirus pandemic. An executive order signed by Gov. Gretchen Whitmer currently prohibits in-person car sales.
Mexico has fewer confirmed coronavirus cases than U.S. and Canada, although auto production has thus far been excluded from essential services lists produced by the Mexican government. The virus has caused 1,069 deaths in Mexico, compared to 51,342 in the U.S. and 2,294 in Canada.
U.S. Rep. Debbie Dingell, D-Dearborn, said the disruption from the pandemic will likely cause automakers to revisit previous assumptions about the effectiveness of their existing supply chains, which often involve parts making multiple trips across the Canadian or Mexican borders.
"I think with so much of the supply chain being overseas, you're going to see jobs moving back," she said. "Every industry has to look at supply chain issues after this. For any responsible government, that's going to be the first job."
Kristin Dziczek, vice president of the Center for Automotive Research, said the pandemic could cause further disruptions if the number of cases in Mexico ramps up on a curve similar to what the U.S. has experienced.
"We have seen the impact of implementing social distancing and stay-home orders as this virus has ravaged economies around the world," she said. "Countries that have high poverty rates also seem to fare less well than more affluent nations."
Dziczek said the auto industry is not alone in wondering about the implementation of the USMCA as the COVID-19 pandemic attracts all the attention in Washington.
"The broad concepts have been known for two years," she said. "The rubber meets the road in what you have do to operationalize this. The U.S. is trying to do that in the course of nine weeks. Normally, it takes three to six months."
Charlie Chesbrough, senior economist and senior director of industry insights for Cox Automotive, said automakers will likely be thankful for the temporary reprieve from the new requirements for duty-free trade with Canada and Mexico.
"Seems like OEMs have plenty of other things to worry about right now than USMCA compliance," he said.