New NAFTA takes effect amid carmaker COVID-19 recovery
Washington — The replacement for the North American Free Trade Agreement takes effect July 1, meaning automakers will have to begin grappling with a new set of trade rules as they try to remain afloat during the coronavirus pandemic.
On Wednesday, 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. Automakers and other companies will also have to make sure 70% of the steel and aluminum they use comes from North American companies.
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. Trump administration officials expressed confidence on Tuesday that enough information has been shared with U.S. companies to ensure a smooth transition for affected industries, including automakers.
"We have done a significant amount of communications and outreach," Brenda Smith, the Executive Assistant Commissioner, Office of Trade, at U.S. Customs and Border Protection, said in a press call. She noted that her agency has released three sets of implementation instructions since April, including one set on monitoring and enforcement procedural guidelines that was released publicly on Tuesday.
Smith said automakers will have about a six-month transition period to get up to speed on the new rules, followed by six months of "informed compliance" in which regulators will keep an eye on their documentation to make sure things are in line with the new expectations. But they avoid stiff penalties. She acknowledged automakers will be in a whole new trade world, beginning on Wednesday.
"Any time you've trained and built processes around a 25-year set of rules, any change is going to be a challenge," Smith said.
"We will not be in a gotcha mode, but we certainly want to make sure that industry is in compliance with the agreement," she continued. "Generally, the expectation of the government is if you make a claim for preferential treatment, your production and content is compliant with the agreement."
Smith said she was not worried about the possibility that the coronavirus pandemic and the international travel restrictions that have been in place in recent months would hamper companies' ability to comply with the requirement, noting that the new rules will be phased in and a lot of the compliance documentation will be submitted electronically.
"In terms of essential workers, they're able to cross the border," she said. "We don't think travel restrictions that are currently in place will impact on our ability to implement this agreement."
In a statement, Ford Motor Co. said it has "long supported USMCA as a template for future U.S. trade agreements and are pleased that it is now officially in effect." The company added it "will continue working closely with (U.S. Trade Representative) to ensure that its implementation spurs innovation and keeps the U.S. auto industry globally competitive.”
General Motors Co. declined to comment, and Fiat Chrysler Automobiles NV did not immediately respond to a request for comment.
Jennifer Safavian, president and CEO of Here for America, which lobbies in Washington for the U.S. operations of international motor vehicle manufacturers, said in a statement the USMCA's implementation is an important step because "an integrated North American automotive market has been key to the expansion of international automakers’ operations in the United States, who together build nearly half of all cars and trucks produced here and support over 2.4 million American jobs."
Charlie Chesbrough, senior economist and senior director of industry insights for Cox Automotive, said automakers will be juggling a lot of competing demands between the new trade rules and the pandemic.
"The industry has so much to worry about right now that USMCA implementation is just icing on the cake," he said. "There will likely be some issues with paperwork and documentation with the new agreement that will take time to sort out. But the industry is more focused on supply and demand issues in front of them today. Factories are trying to maintain COVID compliance and get inventory levels back to more robust levels."
He added: "With the shut downs in March, inventory has fallen and this could hinder sales in June and July. If buyers can’t find exactly what they want, they may decide to delay purchasing.
"Inventory on dealer lots has fallen significantly in recent weeks as demand has improved while supply was constrained," Chesbrough said. "This issue is likely more pressing for OEMs, but certainly supply chain disruptions due to COVID, or USMCA compliance, would not be helpful right now."
Joseph Semsar, Deputy Under Secretary for International Trade for the U.S. Department of Commerce, said in a webinar hosted by the Washington, D.C.-based Wilson Center, a non-partisan policy forum, on Tuesday "the USMCA modernizes critical provisions of NAFTA and sets the stage for creating the automotive industry of the future in North America."
He touted provisions in the trade pact boosting the requirements for the number of North American parts and wage requirements for automakers as seminal achievements for the Trump administration, which has promised to rewrite trade deals the president deemed unfair to American workers during his 2016 campaign.
"According to estimates from the Office of the U.S. Trade Representative new capital investments in the U.S. attributable to USMCA by automakers and battery suppliers will total approximately $34 billion over five years," he said. "The USMCA will incentivize at least $23 billion annually in new U.S. automotive parts purchases within five years."