More Complex Auto Rules of Origin Could Be Re-Evaluated, USMCA Implementing Bill Suggests

As the auto industry grapples with how much the rules of origin for cars and trucks will change from NAFTA to USMCA, the implementing bill that will be voted this week suggests there may be an opportunity to re-evaluate the system when USMCA undergoes review in six years. In two years -- and again in four, and six years -- the International Trade Commission must prepare a report on the economic impact of the auto ROO, including on exports and imports; aggregate employment, employment and wages of automotive workers, “production, investment ... and profit levels in the automotive industries and other pertinent industries in the United States affected by the automotive rules of origin and the interests of consumers in the United States.”

Tom Gould, vice president for customs and trade at Flexport, said the new rules are even more complex than those in NAFTA, which he called “a tangled spiderweb.” He said he's not yet clear on how far back you go in the lifecycle of a product used in the drive train, body or engine to establish North American content. He gave the example of a leather-covered car seat. “Do you have to go back to the cow that leather came from?”

According to the USMCA text, parts of cars that are not core parts -- such as parts of seats -- have to be 62.5 percent North American under net-cost method at the time of entry, and 75 percent by five years after entry into force. So if a hide was from Brazil, that wouldn't be a problem as long as the stitching and stuffing and assembly made up three-quarters of the cost of the seat.

However, full regulations will be “to the maximum extent feasible” be released within one year of the time USMCA enters into force, the bill says. The Senate is expected to vote on USMCA in late January or in February, after the impeachment trial.

Phil Levy, chief economist for Flexport, who was speaking on a company webinar with Gould on Dec. 16, said that the fact that cars entering the U.S. only pay a 2.5 percent tariff, that may not motivate car producers to tie themselves in knots to prove North American content is 75 percent of the vehicle's value, or to prove the company is compliant with the wage rules.

Companies have some flexibility to average North American content over vehicles produced within a country, as long as they're the same model, or over various models produced within one plant.

Companies can have up to five years to ramp up North American content for cars and light truck, and the Office of the U.S. Trade Representative promises to publish guidance within 90 days of the implementing bill's enactment on how companies can do that. The Federal Register notice will lay out a timeline, calculation methodology, how the thresholds will ramp up over time, “and other minimum requirements,” the bill says. It will also tell companies the deadline to file a request for the extended transition.

Within 120 days of receiving those requests, USTR will decide if it will grant the request. It will do so if it determines that the extended time is needed to cover more than 10 percent of the company's production in North America, and if the producer has explained in detail where it can't currently meet ROO, and provides a “detailed and credible plan” of how to come into compliance at the end of the transition. The USTR will release to the public which companies will get extra time to comply.

If they don't get an extended transition, they would need 66 percent North American content for cars and light trucks at the time of enactment, 69 percent one year later, 72 percent two years later, and 75 percent three years later. Heavy trucks get seven years' transition time.

“An alternative staging regime described in this Article may apply on a producer-by-producer basis,” the text says. “Upon request of one of the Parties, the Parties shall discuss and agree on any appropriate extensions or other modifications to the alternative staging regime ... if the Parties consider that such an extension or modification would result in new investment for vehicle or parts production in North America.”

Some elements of the USMCA can take effect as soon as 15 days after the new law is published in the Federal Register, but if they are subject to consultation with trade committees, there will be a longer wait.

The monitoring and enforcement of labor reform in Mexico is a substantial part of the implementing bill, and the mention of up to five Labor attaches detailed to Mexican consulates and the embassy caused a little drama in Mexico over the weekend. But after chief negotiator Jesus Seade visited USTR on Dec. 16, he said that Mexico is satisfied that these attaches are watching the broader reform, not interviewing disgruntled former workers or inspecting factories. The latter duties will be for an international panel, which cannot include government employees from Mexico or the U.S.

The implementing bill says Congress will allow up to $50 million through the end of fiscal year 2023 for the Department of Commerce, with $30 million for labor compliance monitoring and $20 million for environmental chapter monitoring; it will allow up to $40 million for the trade enforcement fund through fiscal year 2023; and it can provide $210 million for salaries and expenses at the Department of Labor through fiscal year 2027. It also will add $215 million for the North American Development Bank, which funds environmental projects. None of these expenditures is subject to spending offsets, the bill says.