USTR Acknowledges Burden of New Auto ROO

A report to Congress designed to reveal whether a stricter auto rules of origin in USMCA is effective says no conclusions can be drawn because of the effects of the pandemic and ensuing semiconductor shortage that has reduced production of automobiles worldwide. The auto industry told the Office of the U.S. Trade Representative that the semiconductor shortage meant 1,520,000 fewer vehicles were built in 2021, and that this year, they expected one million fewer vehicles to be built, because the shortages have not yet been resolved.

"USTR, in consultation with the Interagency Autos Committee, will monitor the USMCA rules of origin to ensure they continue to align with, and support, North American production of" zero-emissions and autonomous vehicles. "Further, we will continue to assess whether the autos rules are effective and relevant in light of future technology and changes in the content, production processes, and character of automotive goods."

Before the USMCA took effect, the Congressional Budget Office estimated that vehicle and auto parts importers would pay $3 billion in duties because of the tighter rules, and the International Trade Commission projected that costs of cars and light trucks would rise, and therefore sales could drop. The rise in cost and drop in production caused by semiconductor shortages dwarfs that estimate.

USTR, which produced the report on the statutory deadline of July 1, said "vehicle and parts producers have been making significant investments in North American sourcing and production in order to meet the rules of origin."

The government heard from stakeholders about whether roll-up should be allowed in calculating regional value content, as it was under NAFTA. Labor unions say they agree with the U.S., that roll-up is not implicit in the agreement. Canada and Mexico say otherwise, and the report said that in general, automakers agree with those countries in the state-to-state dispute. A decision is expected later this year.

"The United States’ position is that the core parts requirement and the overall vehicle RVC requirement are separate and distinct requirements that a vehicle must meet (in addition to the LVC and steel and aluminum purchase requirements) in order to receive preferential treatment under the USMCA," the report said.

Because there is a dispute about the details of the rules of origin, companies aren't sure how they will respond to the changes. Another source of uncertainty is the fact that two years into the USMCA, CBP has not promulgated detailed guidance for the automotive industry. But the report noted that in addition to the day-to-day assessment of whether imports qualify for the agreement's benefits, CBP has reviewed many steel and aluminum purchasing certifications and CBP and the Labor Department have reviewed labor value content certifications.

The report gave examples of administrative burdens on producers, such as CBP's requirement to file labor value content certifications 30 days before the certification period ends. This requires the companies to make the calculations twice.

"Several stakeholders commented to USTR that the new and more stringent automotive rules of origin have placed greater administrative burdens on vehicle and parts producers. That burden may be particularly acute for parts producers given the rules of origin requirements for a given part may differ depending on whether or not the part is incorporated into a passenger vehicle, a heavy truck, or simply traded on its own," the report said. "One commenter reported that the burden and costs of certifications is so high that some suppliers choose not to perform the necessary calculations and documentation and instead simply label parts as 'non-originating,' even if the good might otherwise qualify under the USMCA."

Thirteen vehicle producers have been allowed to have up to a five-year phase-in for the higher regional value content under USMCA: Ford, Honda North America, Hyundai Motor America, Kia in both Georgia and Mexico, Toyota North America, Volkswagen Group of America, Volvo, Nissan North America, Mazda North America, Tesla, Fiat-Chrysler, and a joint venture between Mercedes-Benz and Nissan in Mexico.

One of those producers has made a modification request, as it does not believe it will be able to reach the extended schedule it was granted. The report was silent on whether it was approved, rejected or is in process.

The Motor and Equipment Manufacturers Association said the alternative staging regimes make its job harder, because its customers will need higher North American content at different dates for different models. The trade group complained that when CBP decided to get rid of a USMCA certificate of origin, "automakers and parts suppliers up and down the supply chain have created their own forms and formats for information collection, resulting in a lack of consistency across automotive and parts suppliers."

The report noted that a longer phase-in is needed for electric and hybrid electric vehicles because there's not production of lithium-ion batteries and the cells that make up those batteries in North America, and noted that the factories under construction will not have full production until after 2025. The producers said the battery-related ROO is not realistic with electric vehicles' current supply chain. However, United Autoworkers want more electric vehicle components on the core parts list, including motors and drivetrains, AC/DC inverters, anodes, cathodes, graphite and nickel. With regard to autonomous vehicles, they want USMCA to require North American LiDar, radar sensors, cameras and vehicle communication systems.

Producers recommended that the phase-in be allowed to last longer due to the supply chain disruptions, and that it be offered for new market entrants. The report notes there's no option for new entrants to apply.