Auto Industry Asks for Changes to LVC, Metals Compliance, and for US to Accept Roll-Up

Automakers and their suppliers are telling the Biden administration in comments submitted ahead of an upcoming report that not having a form for certificate of origin has paradoxically made compliance more difficult. They also said that companies are having a difficult time certifying how much workers in the supply chain earn, and that the absence of final USMCA regulations are all problems for trade compliance in the more than three years since USMCA took effect.

The Office of the U.S. Trade Representative is required to produce the report every other year on how USMCA rules affect the competitiveness, employment and investment in North America's automotive sector, and USTR received more than a dozen detailed submissions ahead of a public hearing it will hold Feb. 7.

Several of the trade groups and companies made specific requests on how the administration should change its approach to USMCA, including:

• Electric vehicles need a longer phase-in to meet more stringent rules of origin.
• Annual certifications for labor value content and steel and aluminum content should be submitted up to 60 days after the certification period, rather than 30 days before, because the earlier deadline requires estimation for three months, then recalculating once figures are available.
• Comply with the panel decision on roll-up for core parts in the auto rules of origin.

The American Association of Importers and Exporters, the trade group that represents foreign nameplate automakers with North American production, Autos Drive America, a Mexican automakers' trade group and Volkswagen North America all pressed USTR to accept that the U.S. lost the case on roll-up at the dispute panel.

"For USMCA to fulfill its potential to create jobs and transition to new, greener technologies, the Administration should reconsider and drop its defense of the contested reinterpretation of roll-up provisions, implement the USMCA panel’s decision, and be a leader in upholding the integrity of the agreement allowing automakers to implement the billions of dollars of investments they have planned for the United States and the region," AAEI wrote.

Autos Drive America said the decision to not implement the panel's decision that roll-up is in the treaty creates costs for automakers, "further undercutting jobs and investments and undermining the rule of law." The group added: "Investment decisions depend, in part, on the certainty provided by government implementation of the rules as they were agreed to and the uncertainty caused by failure to implement this and future panel decision may have a chilling effect on investments in several areas, including research and development, supply chains, and production."

The Mexican automakers said specifically that the U.S. should not tie alternative staging regimes to the no-roll-up approach, and that it should include in its "Uniform Regulations the Core Parts calculation methodology's practical examples elaborated by the Canadian Government, which were proposed on the draft versions" of the regulatons. "This would allow for proper calculation both individually as well as Supercore."

The American Automotive Policy Council, which represents the European owner of Chrysler and Jeep, as well as Ford and GM, didn't explicitly say that USTR needs to allow roll-up, but agreed that resolving the dispute now is important, and if there are going to be rules of origin changes as a result, there needs to be ample notice and lead time.

The AAPC said the administration should remember that an effective auto rule of origin "necessitates a careful balancing act: if the RoO is too weak, it allows 'free riders' to enjoy the duty-free benefits without making local investments; if it is too strong (i.e., the burden/cost exceeds the tariff benefit) auto traders will simply pay the tariff instead of making the local purchases and investments required to meet all the elements of the RoO and gain the trade agreement’s preferential tariff benefits.”

A recent Government Accountability Office report noted that the proportion of vehicles imported to the U.S. that pay the tariff has jumped. AAPC said it knows several major automakers that used to use NAFTA but now are exporting from Europe "and simply pay the 2.5% U.S. import tariff rather than make the commitments necessary to meet the stricter USMCA RoO."

The United Autoworkers also highlighted this issue, but their recommendation is that the tariff be hiked to make compliance more attractive. "The United States is clearly out of step with the rest of the world in only having 2.5% [most favored nation (MFN)] tariff rates on light vehicles and components. Given the current overcapacity of electric vehicles and electric vehicle components, a temporary or permanent increase in the rate would create space for the nascent electric vehicle industry to domestically take root," the union said. It said a 2.5% tariff "is not enough to change bad actors' behavior," referring to companies that don't choose to source 75% of its content in the region, or that don't have enough of the supply chain labor paid at least $16/hour.

The UAW complained it doesn't know how the labor value content (LVC) rule is being enforced. "To ensure transparency for all stakeholders, the USTR should maintain a database that captures in real-time the facilities certified and in compliance with the LVC rule and publish a quarterly report to make it public on its website," the union wrote.

The UAW also complained that Chinese firms have been opening plants in Mexico, and therefore state-subsidized products "are evading U.S. Sec. 232 and 301 tariffs and other antidumping and countervailing duty enforcement measures and gaining preferential access to U.S. markets."

Volkswagen said some suppliers are not telling the original equipment manufacturers how much they pay their production workers "because they consider it business proprietary, or because they do not believe the Agreement obliges them to provide such information to automakers. This makes the LVC certification process quite burdensome administratively and impacts our ability to accurately forecast our LVC compliance, which itself is another significant administrative burden. For these reasons, VW would support the adoption of a formal rule that, for purposes of calculating LVC, at least a U.S.-based supplier should be presumed to pay their workforce $16/hour."

The Mexican Association of the Automotive Industry, or AMIA, also asked for that. "There is plenty of evidence that average wages in US auto parts plants are well above US$20 per hour," it wrote, citing Bureau of Labor Statistics data of an average of $31.69.

"OEMs face significant challenges in obtaining this information, since suppliers constantly reject providing it when asked," the group wrote.

However, Daimler Truck North America undercut Volkswagen and AMIA arguments by arguing that it's difficult to meet the LVC standard because so many employers don't pay that amount. "During the COVID pandemic, many U.S. suppliers moved to Mexico to obtain workers at a cost-effective hourly rate. Moreover, many suppliers in the U.S. pay production workers closer to the Federal hourly wage rate or the rate mandated by their state or city. In many instances, this wage is well below the $16.00/hour rate mandated by the LVC rule," the heavy truck manufacturer wrote.

MEMA, the vehicle suppliers association, said it understands that USMCA final domestic regulations have been completed, but have not cleared interagency review. Given that the review has been going on for years, MEMA asked USTR and CBP to release sections they can agree on. They said they understand the final regulations will provide guidance on LVC certification, and might address customers' wage rate solicitations to their suppliers.

The Canadian Vehicle Manufacturers’ Association also said there needs to be more clarity, including how the rule of origin for EV batteries will change in July 2025 -- will product-specific rules of origin for lithium-ion batteries be 75% North American under the net cost method?

MEMA also said the end of the specific NAFTA certificate of origin was meant to be helpful but had the opposite effect. "Each vehicle producer has their own forms and formats for information collection and suppliers up and down the chain may also have their own forms," the group wrote. Daimler Truck also complained about this change.

Heavy trucks are on a longer phase-in timeline than passenger vehicles, but Daimler Truck North America said the industry could use an additional three years, to July 1, 2030, to reach 70% regional value content, both to help fund the transition to hydrogen and electric cargo trucks, and to help in case a particular supplier closes or stops selling to the heavy truck market. The company said it expects to reach 70% on July 1, 2027, but would like "additional breathing room."

It noted because volumes are lower in the sector, EV battery component suppliers aren't as motivated to locate in North America, and asked for a less stringent standard than passenger vehicles. It also noted that the weight of electric pickup trucks pushes what used to be a light truck into the heavy truck category.

The commenters disagreed on the effect on jobs of the new requirements in USMCA.

The group that represents Detroit's Big 3 said the LVC clearly drove hiring in the U.S.

The Mexican automakers' trade group noted that a study by the International Trade Commission said there were only 3,912 additional jobs due to the stricter RoO.

Volkswagen said that even though complying with the new treaty increased costs of production and costs for buyers, "these changes have had a generally positive economic impact on our wages, employment, and production in the United States and in the North American region to date."

The UAW, citing data about imported vehicles and parts from Mexico, wrote: "given the trade imbalance outlined above, if the USMCA’s Rules of Origin provisions are encouraging additional investment in North America, it is clearly being disproportionately directed into Mexico at the expense of the United States."