As the new North American trade pact awaits ratification, automakers are examining how the deal’s content and labour requirements might affect how they source their parts. In Canada, it could be the Japan-based automakers that have the biggest decisions to make with their supply chains.
If the new United States-MexicoCanada Agreement (USMCA) is ratified, 75 per cent of a vehicle’s content must be sourced within North America so as to be exported tariff-free, up from 62.5 per cent under the North American Free Trade Agreement. New rules also require that 40 per cent of a vehicle be built by North American workers who are paid more than $16 an hour, and that 70 per cent of the vehicle’s steel and aluminum must be purchased within the trade nations.
If Canada, Mexico and the United States ratify the agreement, the new rules would begin to take effect Jan. 1, 2020.
SOME WILL EAT THE TARIFF
Automakers that assemble higher-end or highly profitable vehicles in North America might not feel much pressure to adhere to the new rules, as they would only have to pay a 2.5 per cent tariff to export noncompliant vehicles, said Joe McCabe, CEO of AutoForecast Solutions.
“If it’s a marquee product or a higher-end product, and they don’t meet the requirements, and the penalty is only 2.5 per cent, then you’re going to see them just looking to find a way to pass that 2.5 per cent on or find a way to eat it, because there’s some profitability in those vehicles,” McCabe said.
It’s a decision that Toyota Motor Manufacturing Canada will have to make under the USMCA. In late 2018, Toyota began producing the fifth-generation RAV4 at its Woodstock, Ont., plant, with one of its Cambridge, Ont., plants upgraded to join it in February.
The RAV4, a crucial vehicle for the automaker, is Toyota’s top-selling model in both Canada and the United States. Most of the RAV4s produced in Canada will be shipped to the United States, raising questions whether the crossover will comply with the new rules.
Fred Volf, president of Toyota Motor Manufacturing Canada, said the automaker is examining how to make sourcing for the RAV4 meet USMCA standards.
“This RAV was developed well before the new USMCA was struck, so it was compliant with the old NAFTA rules,” Volf said. “So now we’ll have to move forward to understand what has to be done.”
If the vehicle’s components don’t meet USMCA’s requirements, Toyota might decide it could afford to pay the tariff on a vehicle as profitable as the RAV4, McCabe said.
“They’re going to find a way to eat that 2.5 per cent.”
MANY VEHICLES MEET NEW RULES
Other manufacturers appeared to be set to meet sourcing requirements. According to data from the U.S. National Highway Traffic Safety Administration (NHTSA), all of Fiat Chrysler Automobiles’ products built at its Brampton and Windsor assembly plants in Ontario appeared to meet the 75 per cent North American sourcing rule, as did the Ford Edge crossover at the automaker’s Oakville, Ont., plant and the Chevrolet Equinox crossover at General Motors’ Ingersoll, Ont., plant.
Sourcing questions also could come into play at Honda’s Alliston, Ont., assembly plants, which build the Honda Civic compact car and CR-V crossover. According to U.S. regulators, 65 per cent of the CR-V’s content is sourced from the United States or Canada. About 60 per cent of the Civic four-door’s content was sourced from Canada or the United States, while 20 per cent was sourced from Japan, according to NHTSA.
Honda Canada did not respond to an Automotive News Canada request for comment .
Like Toyota and the RAV4, the CR-V and Civic are crucial, high-volume models for Honda. The automaker could elect to simply pay the 2.5 per cent tariff if the vehicles did not comply with the new rules. Still, AutoForecast’s McCabe said the USMCA rules could spur Japanbased suppliers to invest in North America to help their customers meet the requirements.
“They’re going to make sure they find a way to survive as a group, so who knows if we see more Japanese-based suppliers say, ‘We’ll put a bigger footprint next to that facility if it means we’ll help our customer, Toyota, reach certain goals,’” he said.
NEW PLANTS POSSIBLE BUT NOT LIKELY IN CANADA
Automakers also could consider building new engine and transmission plants in North America to meet the USMCA’s requirements. For instance, in November BMW said it was considering building a second engine and transmission plant in the United States as its North American assembly footprint grows.
Kristin Dziczek, vice-president of industry, labour and economics at the Center for Automotive Research in Ann Arbor, Mich., said any new transmission or engine plants that Asian or European automakers build to comply with the USMCA probably would be built in the United States. Choosing to open a new plant in Canada would likely not go over well politically with the U.S. government, Dziczek said.
“There are incentives for it to be U.S. or Canada, but the optics right now for Canada are bad with what they would face fom the president.”
All of this hinges on whether the three countries ratify the deal. The biggest hurdle appeared to be in the United States, where the incoming Democratic majority in the House of Representatives could complicate things for the Trump administration. In December, House Democratic Leader Nancy Pelosi signaled that passage of the USMCA could depend on the strength of the enforcement provisions for the deal’s labour rules and environmental protections.
Hans Greimel and Naoto Okamura of Automotive News contributed to this report.