Manufacturers should prepare for increased regional value content for the automobile sector, speakers said during an American Shipper webinar.
The U.S.-Mexico-Canada Agreement (USMCA) maintains many of the same requirements of the North American Free Trade Agreement (NAFTA), but manufacturers need to prepare for updates in the automotive and textile and apparel sectors, speakers said Thursday during an American Shipper webinar.
“I think as a major takeaway when we look at all these enhancements, the USMCA is sometimes mistaken as being revolutionary or a completely different trade deal, but a lot of the requirements of NAFTA will carry over such as the reliance on concepts of tariff shift and regional value content,” said Suzanne Richer, the director of trade advisory practice for Amber Road, which sponsored the webinar. “They may differ by sector from NAFTA, but the USMCA will carry these major characteristics over to the free trade agreement.”
Automobiles, in particular, would have to meet a higher standard for regional value content (RVC), which requires that products include a certain percentage of origin from the U.S., Mexico or Canada, if the USMCA is ratified. The RVC is expected to jump to a 75 percent requirement of automotive content be made in North America, which is up from 62.5 percent, Richer said. The RCV for heavy trucks is slated to grow to 70 percent by 2027.
Auto components are categorized as core, principle or complementary parts, which will play a role in qualifying passenger vehicles and light and heavy trucks, said Phani Reddy, Amber Road’s senior project manager.
“Most of the components that are likely sourced today from China or other countries may change,” Reddy said. “Some of these components will need to be locally sourced from either Mexico, the U.S. or Canada.”
There are two options to calculate RVC under article 4-B.3 of the USMCA, Reddy said, and manufacturers should use technology to help them calculate both options.
“Manufacturers need to explore both of the options and evaluate applications that will be equipped to intelligently apply either of these RVC calculation methods,” he said. “A tool that is easy to use and has data presented in one or more formats that can give insight into the RVC calculations should also be considered.”
In addition to the core parts rule, the steel and aluminum rule and labor value content (LVC) rules also apply, Reddy said.
The LVC rule would require that by 2023 40 percent to 45 percent of automobile content be produced by workers earning at least $16 an hour. The increased LVC would increase competitiveness across the three countries, Richer said.
“Looking at this labor content rule, the key here is that it’s going to support better jobs in the United States for both producers and workers,” she said. “It should make things competitive such that a U.S. company is less likely to take manufacturing and place it in another country.”
USMCA side letters also exempt Canada and Mexico from any U.S. Section 232 auto tariffs that may come into effect next month. Both would be totally exempted from any measures for 60 days, and then exemptions would apply to the first 2.6 million passenger vehicles imported annually and all light truck from Canada and Mexico. The exemption also would apply to $108 billion in auto parts annually in declared customs value for Mexico and $32.4 billion for Canada.
“While exemptions would apply to the first 2.6 million finished passenger vehicles imported from Canada and Mexico, respectively, each calendar year, imports from Mexico in 2018 were a higher number of finished cars than provided for under the quota,” said Brian Bradley, an associate editor for American Shipper. “The side letters were completed in 2018 and negotiated based on 2017 import levels, so the actual level of imports from Mexico actually surpassed the quota that the side letter would provide there.”
In 2018, the U.S. imported 2,671,083 passenger cars and $59.4 billion in automotive parts from Mexico and 1,692,423 passenger cars and $16.5 billion in automotive parts from Canada, according to data from the U.S. Department of Commerce.
The USMCA also continues NAFTA’s “yarn-forward” rule of origin, which “generally means that each textile and apparel component, starting with the yarn used to make the apparel, must be formed within the region covered by the free trade agreement,” Bradley said.
The de minimis would be upped from 7 percent under NAFTA to 10 percent of a major part under the USMCA. The new free trade agreement also would cap elastomeric yarn at 7 percent along with provisions for apparel assembled in Mexico.
“While these changes proposed in USMCA will likely add compliance cost, manufacturers will need to provide tools that will help their trade compliance teams keep up with these future challenges, enlisting solutions that can adapt with ever-changing regulations and applications that add value to … operations,” Reddy said.
The USMCA also leaves NAFTA’s basic structure in tact with a few adjustments for tariff preference levels (TPLs), which provide for a certain amount of non-originating textiles and apparels to be imported from one North American country into another duty free.
The TPLs would allow Canada to import 11 million more square meter equivalent in cotton or man-made fiber material and 450,00 square meter equivalent in wool apparel tariff free from the U.S., Bradley said. American importers, however, would only be able to import about half the amount of cotton or man-made fiber from Canada than what is being provided in NAFTA along with less wool apparel, he said.
The USMCA is only reducing TPLs in cases where NAFTA had a low utilization rate, he explained.
“USMCA will newly exempt goods imported under TPL thresholds from merchandise processing fees, or the MPF,” Bradley said. “These goods are generally treated as non-originating and therefor are generally subject to merchandise processing fee, but USMCA actually puts forth for a change in domestic law to waive the MPF for the imports into the United States.”
The new textile and apparel provisions also will strengthen customs, Richer said, as there will be greater “consultation across the borders to facilitate and cooperate on issues.”
Customs also will be able to audit certificates of preferential origin, which under the USMCA, unlike NAFTA, do not have a prescribed format or certificate number, Reddy said. The certificates can be shared electronically and include digital or electronic signatures, he said, but must meet certain data requirements, such as the issuer of the certificate as well as the address, telephone number and other details.
“Issuers of these certificates need to possess all the required data, including qualifications as well, that will justify how a required rules of origin were met. Trade compliance managers and teams need to consider evaluating tools that will help them go through such potential compliance audits,” Reddy said. “An audit package containing all the preferential certificates received from the suppliers, including data that justifies how a finished good met the RVC requirements, would be ideal.”
Although there are still significant hurdles to overcome before the USCMA is ratified, Richer said the time is now for manufacturers to begin preparing for it.
“First you classify then you qualify. Now would be a wonderful time for you to reconsider the internal expertise that you have in terms of the area of classification because if you misclassify the product you’re going to read the wrong qualifying rule and then your product will not qualify appropriately,” she said. “Mostly [free trade agreement] qualification is going to be with the import and the export trade function … so it’s really important these teams are up to par on the fundamentals, the requirements of the commercial invoice, the classification, everything that will help drive accuracy in these future declarations.”