NAFTA replacement looms as carmakers emerge from COVID-19 shutdowns
Washington — With assembly lines returning to full production and auto sales beginning to rebound from the coronavirus pandemic’s impact, carmakers are turning their attention to the replacement for the North American Free Trade Agreement, which takes effect July 1.
On that date, the trade rules by which automakers have played since 1994 will be replaced by a new pact requiring automakers to produce cars with 75% of parts originating from the United States, Canada or Mexico — up from 62.5% — within five years to qualify for duty-free treatment. The pact, known as the United States Mexico Canada Agreement, was signed into law by President Donald Trump in January.
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.
The U.S. Trade Representative only recently released uniform rules for the trade pact that has been agreed to by the U.S., Canada and Mexico.
The new documents, released in early June by the federal agency, spell out the rules of the road that automakers must follow to continue to avoid tariffs. The documents lay out definitions for terms that will be used to measure compliance with the new trade rules, such as accessories, spare parts, tools and customs value.
Automakers are likely to be grateful for the increased clarity, said Charlie Chesbrough, senior economist and senior director of industry insights for Cox Automotive. But he said it will be tough for automakers to focus on compliance as they and their suppliers try to recover from two-month factory shutdowns in the U.S., Canada and Mexico.
"The implementation of USMCA couldn’t come at a worse time for the industry," Chesbrough said. "Finally having closure on rules and regulations is something OEMs and suppliers have wanted for some time. However, understanding and complying with new policies could take some time, and some leniency from governments may be necessary. With plants now reopening under new safety precautions, getting the supply chain up and running and producing at high volumes is the focus today."
Jennifer Safavian, president and CEO of Here for America, which lobbies in Washington for the U.S. operations of international motor vehicle manufacturers, said her organization's members "are very diligently working to become ready" for the implementation of the new trade pact.
"There's no question the COVID shutdown of production threw a wrench in their plans," she said. "This is something they've been planning for, but obviously nobody could have been prepared for that."
Safavian noted that automakers have only had the USMCA definitions for about a week, and she said they are waiting for clarification on other issues like how the new rules for car worker earnings, known as labor value content, will be defined.
"It's a pretty lengthy document," she said. "Our members are still reviewing it. They definitely have more questions, but they're pleased to have some clarity."
She said the pandemic shutdowns at suppliers could make it more difficult for automakers to get answers about auto parts that will be needed to demonstrate compliance.
"We were hoping to get more time," she said, nothing that the USMCA implementation date was pushed back one month from its original proposed start date. "We're grateful we did get a little more time. The administration was originally looking at June 1."
The USMCA allows automakers to request permission to implement an "alternative staging regime" that would allow them to extend the deadline for compliance with the new trade rules for as long as five years. Automakers have been asked to submit finalized alternative staging plans by Aug. 31.
Kristin Dziczek, vice president of the Center for Automotive Research, said the incongruence of the deadlines could cause short-term problems for automakers.
"If you're a company that wants to do alternative staging, you have to get your plan in by Aug. 31, but you have to start complying with something on July 1," she said. "There's a little bit of ambiguity there."
Dziczek said automakers need flexibility in light of the rapidly changing market conditions — especially since demonstrating compliance will require increased communication with suppliers who are also in recovery mode.
"They know the principle core and content levels they have to get to," Dziczek said. "The base parts of the agreement have been known for a couple of years... They know what they have to do, but how do you certify that you're in compliance?"
U.S. Rep. Haley Stevens, D-Rochester Hills, agreed that automakers need as much clarity as possible on the rules that will begin governing their industry 's North American operations in a scant two weeks.
"This is a critical time for our incredible automotive industry, which is doing everything it can to weather this economic downturn," she said. "With implementation of the USMCA just weeks away, our automakers and suppliers deserve more certainty, clarity and leadership from their federal government."