Auto executives in Canada and the United States are lobbying U.S. President Joe Biden’s administration to alter its predecessor’s stringent stance on North American trade provisions.
Since the United States-Mexico-Canada Agreement (USMCA) went into effect July 1, the United States has interpreted provisions on how regional content is calculated differently from what was originally agreed upon by the three signatory countries, said David Adams, president of the Global Automakers of Canada.
The U.S. interpretation makes “meeting the ... content provisions that much more difficult for everyone to achieve,” Adams wrote in an email to Automotive News Canada.
Auto groups have raised concerns in recent months about the U.S. approach to calculating regional value content (RVC) for passenger vehicles and light trucks under the USMCA.
When fully implemented, 75 per cent of a vehicle or “core” part — including engines, transmissions and suspensions — must be manufactured in one of the three member countries to be shipped without tariffs. That’s up from 62.5 per cent under the former North American Free Trade Agreement.
In question is a so-called “roll-up provision,” a source familiar with the details of this issue said. The industry, Canada and Mexico are interpreting the provision differently than the United States.
The industry’s understanding is if “a part is conforming to its [regional content] rule, and you put it in another assembly, it is now 100-per-cent conforming for all other purposes of the rule,” the source said. “So I have part X. It has to meet a 70-per-cent content rule, and it does. [If] I put part X into component Y... I can count all of part X toward the content for part Y instead of 70 per cent of part X.”
The United States sees it differently.
United States “Customs is now saying, ‘No, if it’s 70 per cent and you put it in something, it’s 70 per cent and that’s all you can count” toward the larger component or vehicle’s regional value content, the source said.
“This interpretation was entirely unexpected,” Adams said, “and if it sticks, it will take many [automakers] time to make adjustments and potentially rejigger supply chains to avoid the tariff. Either way, there are inefficiencies, which [equal] costs.”
‘WORK IT OUT’ QUICKLY
The issue has grabbed the attention of both Canadian and U.S. executives. Matt Blunt, president of the American Automotive Policy Council, said it is “extremely important” that the three countries “work it out as quickly as possible.” Blunt’s group represents General Motors, Ford Motor Co. and Stellantis.
“We think it’s important for Canada and Mexico and the United States to resolve this and any issue related to the USMCA quickly, but certainly one as significant as this one,” he said.
“It should really be treated as a diplomatic priority, in our view, to ensure that the USMCA is properly implemented.”
Adams said he hopes Katherine Tai, who was confirmed as Biden’s U.S. trade representative on March 17, will view the issue as a “top priority”.
The source familiar with the USMCA content issue expected it to be “quietly resolved” by the three nations, though the politics of the situation could be tricky for Biden and Tai.
“It would be very hard for Biden to say, ‘No, we side with the industry and Canada and Mexico, and we want to let you roll up’ because that would mean less content [originating from] North America,” the source said.
Another source familiar with discussions among the three countries said Canada and Mexico were waiting for Tai to be confirmed before raising the issue with the United States.
The U.S. interpretation of the USMCA has not “gone over too well with the other two countries,” the source said. “And that’s why I think they’re really hoping that the new administration, that they could talk to them about this and hope they can all get back on the same page.”
‘AS TOUGH’ AS LIGHTHIZER?
Tai brings a wealth of experience to the job and is likely to pursue a more cautious approach to trade than her Trump-era predecessor, Robert Lighthizer. But it remains unclear whether she would veer far from the former administration’s protectionist view of North American trade rules and other issues that have rankled Canadian auto executives in recent months.
“She’s going to be as tough as her predecessor,” said Flavio Volpe, president of the Automotive Parts Manufacturers’ Association.