At the end of August, the United States and Mexico reached an agreement to revise portions of the NAFTA agreement.
While the NAFTA negotiations had been rocky from the start– Canada’s position suddenly went from bad to worse. Two threats were being levied: a bilateral deal instead of a trilateral deal and auto tariffs.
The race was on for an agreement to be reached by October 1 to get the approval of the U.S. Congress before the signing in of the new president of Mexico. With literally minutes to go before midnight on September 30, the United States – Mexico – Canada Agreement (USMCA) was signed. The USMCA contains 34 chapters and covers $1.2 trillion in annual trade.
What does the deal say about automobiles and auto parts?
Here’s an interesting side-by-side that shows elements of the USMCA related to automobiles and auto parts.
“The deal establishes a five-year transition period after the agreement enters into force for the regional value content requirement for autos to increase to 75 per cent, up from a current 62.5 per cent.”
“…depending on how you count, the auto industry is already sourcing about seventy per cent of its content from North America. And the new cap on tariff-free vehicle imports is set at a level of more than a million above the current figure…It won’t have much of an impact on the industry, primarily because the targets they have set fall into the range of where things are at now.”
The deal “also requires 40 per cent of the vehicle’s value to be made in high wage areas paying $16 an hour. In addition to benefiting Mexican auto workers, this provision will also favour continued auto production in the United States and Canada.”
“On the face of it, the ‘high wage’ requirement for the origin of parts used in imported vehicles does seems like something new and potentially important. However, the penalty for importing vehicles that fail to meet this target is small—a tariff of just 2.5 per cent. Fiorani and Schuster both said that some car companies, rather than encouraging their Mexican suppliers to pay higher wages or reorganizing their supply chains and sourcing more of their parts domestically, are likely to go ahead and pay the tariff…A 2.5-per-cent tariff on vehicles imported from Mexico is less costly than raising the wages of Mexican workers, and far less costly than moving production to the United States”.
Before detailing additional elements of the USMCA related to automobiles and auto parts, Section 232 needs to be clarified.
A Section 232 National Security Investigation of Imports of Automobiles, Including Cars, SUVs, Vans and Light Trucks, and Automotive Parts was launched in May 2018 by the U.S. Secretary of Commerce. The investigation was launched to determine whether imports of automobiles, including SUVs, vans and light trucks, and automotive parts into the United States threatened to impair the national security as defined in Section 232 (U.S. Department of Commerce initiates Section 232 investigation into auto imports, https://www.commerce.gov/news/press-releases/2018/05/us-department-commerce-initiates-section-232-investigation-auto-imports).
A “Section 232 of the Trade Expansion Act of 1962, authorizes the President of the United States, through tariffs or other means, to adjust the imports of goods or materials from other countries if it deems the quantity or circumstances surrounding those imports to threaten national security” (Section 232 of the Trade Expansion Act, https://www.investopedia.com/terms/s/section-232-trade-expansion-act.asp).
To be noted: AIA Canada, Auto Care and the Automotive Aftermarket Suppliers Association submitted joint comments to the U.S. Secretary of Commerce in early June, urging the Trump administration to consider the need and severity of imposing tariffs on imported autos and auto parts, as well as the unintended negative consequences of such actions.
Additional elements of the USMCA related to autos and auto parts:
- Vehicle manufacturers source at least 70 percent of their steel and aluminum from within the three countries.
- The U.S. has agreed that existing auto production facilities are excluded from potential Section 232
- The U.S. agreed to exclude 2.6 million finished autos and $32.4 billion U.S. from Section 232, resulting in Canada agreeing to what are in effect quotas. Since Canada currently produces just under two million light vehicles, and exports auto parts with a value of $16 billion U.S., these are ceilings that Canada can accept without difficulty.
- The U.S. will refrain from imposing Section 232 tariffs on Mexico and Canada for “at least 60 days after imposition of such a measure” during which the parties can negotiate an “appropriate market-based outcome”.
Looking to become an expert on the USMCA? Read on: