USMCA ROOs Increased Costs in Auto Supply Chains, Sourcing From North America, ITC Report Says

The change from NAFTA to USMCA rules of origin, and in particular an increased regional value content threshold, increased sourcing of auto parts from Canada and Mexico by U.S. automakers as well as parts production in those two countries, the International Trade Commission said in a report released June 30. But the new agreement’s labor value content rules increased labor costs, causing production to relocate to the U.S. and Canada, the report said.

While the full effects of the new agreement are unclear -- it has been in force only since July 2020, and many of the new rules of origin have not been fully implemented as a result of staging by many automakers – “production, trade, employment, and investment data trends from 2018 to 2022 showed few signs of changes in the overall competitiveness of the U.S. automotive industry after USMCA’s entry into force,” the ITC said in a news release.

“The full impact will likely not be apparent until the agreement is fully implemented, in 2027, or later,” the ITC added.

Among other things, the report found new USMCA steel and aluminum purchasing requirements did increase sourcing of steel and aluminum from USMCA countries, and increased steel and aluminum production. However, it also increased input costs. In general, higher costs resulted in increased imports of light vehicles from the rest of the world, and lower tariff preference utilization reduced U.S. imports of light vehicles from Canada and Mexico, the report said.

Production slowdowns for U.S. vehicles and parts in 2020 and 2021 were likely due to the COVID-pandemic and semiconductor chip shortages, and occurred “despite the positive estimated impact of the ROOs on U.S. production,” the report said.

The effect is still unclear of a USMCA panel finding that the U.S. was misinterpreting provisions on whether “core parts” qualify as originating. But uncertainty over the dispute “may have delayed the sector’s investments or other adjustments to the ROOs, contributing to the minimal effects from the ROOs seen so far,” the report said. “Alternatively, some vehicle manufacturers may have increased sourcing from USMCA countries, assuming a final decision resulting in the most strict interpretation of the dispute.”

The dispute also delayed CBP’s finalization of a USCMA guidance for vehicle manufacturers, creating more uncertainty. “This uncertainty stems from both the disagreement itself, as some vehicle manufacturers may need time to adjust their supply chains, depending on the resolution of the disagreement, and the lack of official CBP guidance,” the ITC said.

The 13 approved petitions for alternative staging under the agreement affected less than 15% of the models produced in USMCA countries, though those models accounted for about 22% of North American production and “a smaller percentage of U.S. sales,” the report said. “Nearly all alternative staging plans end by mid-2025. Two extend farther with the latest ending in mid-2027,” it said.