USMCA, IRA Rules Driving Auto Industry Changes; UFLPA Lurks as Concern

The U.S. is trying to negotiate with Canada and Mexico on auto rules of origin details, rather than complying with a dispute settlement panel decision that originating supercore parts are considered 100% North American as you calculate the vehicle regional value content, according to the leader of the trade group that represents Detroit's Big Three automakers.

Speaking at the Georgetown Law International Trade Update conference June 13, Alex Perkins of Mehlman Consulting noted the auto dispute dwarfs the dairy dispute with Canada in terms of its economic significance.

American Automotive Policy Council President Matt Blunt told Perkins during the discussion that the U.S. is trying to get the three countries to agree on "a new methodology that would fit in with their requirements" but would also recognize the panel's ruling.

Blunt said AAPC agreed with the Mexican and Canadian argument -- which the panel upheld -- that during the negotiations, the U.S. was prepared to maintain roll-up as a way of meeting rule of origin thresholds. "Roll-up is a fairly common requirement in rule of origins," Blunt said.

He said U.S. compliance doesn't make a big difference to General Motors, Ford or Stellantis in terms of how many of their models will be able to claim USMCA benefits. "It’s really nice to have the flexibility, but we don’t see any material change" either way, he said.

He said foreign automakers may need roll-up more. However, Blunt said in general, automakers think it's important that parties abide by panel decisions so that the dispute settlement system can have credibility.

Perkins said the Office of the U.S. Trade Representative argues that if roll-up is allowed, it will diminish investment in the auto parts sector in the region.

Blunt replied, "We just don’t think that’s the case at all. Look at the totality of the rule of origin." He said the labor value content requirements, for instance, have strongly affected how automakers decide to invest.

Blunt was one of three speakers discussing how USMCA auto sector rules are influencing the business landscape, with a Panasonic and U.S. Steel representative. Perkins asked the three what keeps them up at night. Kaitlin Wojnar, U.S. Steel counsel for international trade and public policy, said an end to 25% tariffs on imported steel. Blunt said the possibility that a Republican Congress and president could undo the Inflation Reduction Act. "Regardless of your position on specific incentives, we need consistency on incentives that are offered," he said.

And Jeff Werner, vice president of corporate and government affairs at Panasonic North America, said finding enough workers to scale up to meet demand and how broadly the Uyghur Forced Labor Prevention Act will be enforced in the sector. He said Panasonic is sure it has no suppliers in Xinjiang, and that its primary suppliers do not have direct suppliers from Xinjiang. "But maybe the third and fourth and fifth tier, it’s more difficult to prove that," he said.

Werner noted that while the looser stringency in the battery rules of origin was influential -- batteries and cells can qualify based on tariff shift rather than regional content -- the IRA matters more.

Panasonic opened its first EV battery factory in the U.S. in Nevada in 2017, before NAFTA was fully renegotiated, and announced its second factory planned for Kansas before the IRA passed. It is now considering building a third plant in North America, even though the Kansas plant, which is expected to employ 4,000, has not opened.

The IRA has much stricter standards for what counts as a North American EV battery, and consumer tax credits, known as 30D in shorthand, are based on those standards. However, the IRA also offers tax benefits to manufacturers of green goods, known as 45X in shorthand.

"For a company like ours, it’s the 45X, the manufacturing credit, this is the game changer for us," Werner said. Panasonic intends to quadruple its North American production (which is so far entirely in the U.S.).

Not meeting the USMCA EV battery standards could cost an automaker 2%, 6% or possibly 25%, depending on whether it's a car or truck, and where the vehicle is assembled. But, according to an Axios estimate, the production credits shrink the costs by one-third. Testimony at the House Ways and Means Committee estimated that across all battery makers, it could be worth almost $200 billion over the next seven years.

Werner said certain automotive manufacturers really want their consumers to be able to receive the consumer tax credit for batteries, which, in a few years, will mean Panasonic cannot buy critical minerals extracted or processed in China. "We’re working as hard as we can to find domestic sources or sourced from free trade countries, but it’s just not there now. We need a runway to get there," he said.

He said that derisking is on the minds of Panasonic and other battery manufacturers, but the government needs a "clear-eyed view" of what's feasible. "If we have a view to stand up a domestic supply chain here, we can’t shut down the production that’s already here by denying the inputs that are needed," he said.

Wojnar said the steel industry is delighted that the melted and poured standard will prevent foreign automakers in Mexico from importing carbon steel slabs from Japan or South Korea or the cheapest source if they want their vehicles to enter the U.S. duty-free. "What that melted and poured did is, it basically opened up the Mexican market to us," she said.

But whether the steel industry continues to thrive "depends on the longevity of [Section] 232" tariffs, she said. She expressed concern that the global arrangement on steel and aluminum would allow European steel to enter without the restriction of tariff rate quotas, and that other countries subject to quotas (like Korea) might join the club.

When the three countries start their sunset review of USMCA, she said steelmakers will argue that duty-free status for other steel-intensive goods, such as energy infrastructure and appliances, should be based on North American steel content, and that steel should also be subject to the melted and poured standard.

Blunt said the auto sector doesn't want any changes to USMCA, they just want it to continue. "We think the USMCA is working, we think it’s spurred billions of dollars in investment," he said. "We do think it’s achieving the goals of bringing more production back to the United States."