Alerts and Updates

USMCA Implementation Will Require Changes – Especially for the Automotive Industry

May 14, 2020

The USMCA contains new rules of origin and certain associated requirements that will have profound implications for the automotive industry.

The U.S. Trade Representative (USTR) recently notified Congress that Canada, Mexico and the United States have taken the necessary measures to comply with their commitments under the United States–Mexico–Canada Agreement (USMCA), and that the agreement will enter into force on July 1, 2020. As discussed below, the USMCA, which will replace the North American Free Trade Agreement (NAFTA) upon its implementation, will impose a wide range of new requirements. Companies operating in certain sectors of the economy, especially the motor vehicle industry, should strongly consider taking actions to prepare for and comply with these new requirements as soon as possible.

Background on NAFTA and the USMCA

After his election, President Trump had the USTR provide notice to Congress of the intent of the United States to renegotiate NAFTA with Canada and Mexico on May 18, 2017. Following numerous rounds of trade talks, on October 1, 2018, President Trump announced that the three countries had reached agreement on a renegotiated NAFTA, which would be referred to as the USMCA, Shortly thereafter, on November 30, 2018, President Trump and the leaders of Canada and Mexico signed the USMCA.

Subsequently, in order for Congress to be able to review and approve the USMCA under the fast track process pursuant to the Trade Promotion Authority established by the Bipartisan Congressional Trade Priorities and Accountability Act of 2015, the Trump administration took several sequential actions. To begin with, on January 29, 2019, the USTR provided Congress with a list of changes required to be made to U.S. law in order for the U.S. to comply with its commitments under the USMCA. Next, the U.S. International Trade Commission (ITC) conducted a study of the potential effects of the USMCA on the U.S. economy. On April 18, 2019, the ITC issued a report relating to the findings of the study, in which it concluded that the USMCA would increase U.S. employment by 176,000 jobs and raise the GDP by $68.2 billion. Following the issuance of the ITC’s report, the USTR consulted with Congress regarding the USMCA, and pursuant to such consultations, the USTR renegotiated certain aspects of the USTR with Mexico and Canada, which resulted in the three countries agreeing to a protocol of amendment to the proposed USMCA on December 10, 2019.

Shortly thereafter, the Trump administration submitted proposed implementing legislation to Congress on December 13, 2019, and by January 16, 2020, both the House and the Senate had passed the United States–Mexico–Canada Agreement Implementation Act, which President Trump signed into law on January 29, 2020 (Pub. L. No. 116-113). After the signing of the USMCA Implementation Act into law, Mexico and Canada each provided notification to the U.S. that they had taken the necessary actions to amend their laws in ways required to comply with the USMCA by mid-April 2020, and on April 24, 2020, the USTR announced that the U.S. also had taken such required actions and that the USMCA would enter into effect on July 1, 2020.

The USMCA is comprised of 34 chapters and 12 side letters. It retains most of NAFTA’s market-opening commitments, while making notable changes to market access provisions for motor vehicles and agricultural products, and to rules and disciplines, such as on investment, government procurement and intellectual property rights. New issues are also addressed in the USMCA, such as digital trade, anti-corruption and good regulatory practices, which will be the subject of forthcoming Alerts. For this Alert, the focus will be on the new USMCA requirements pertaining to the automotive industry.

The USMCA’s New Rules of Origin and Other Changes Affecting the Automotive Industry

The USMCA contains new rules of origin (ROO) and certain associated requirements that will have profound implications for the automotive industry. A summary of these new requirements is provided below.

Preferential ROO were established under NAFTA to ensure that only eligible products receive preferential tariff benefits if the good was made wholly or in large part within North America. Pursuant to the NAFTA ROO, goods that contained materials from non-NAFTA countries generally could be deemed to be North American if the materials were sufficiently transformed in the NAFTA region to undergo a change in tariff classification (i.e., a “tariff shift”). In some cases, certain products also were required to have a minimum level of North American content in addition to undergoing a tariff shift. Such regional value content (RVC) could be calculated using either the transaction value (TV) method or the net cost (NC) method. The TV method is based on the price of the good, while the NC method is based on the total cost of the good less certain costs (e.g., royalties and packing and shipping). Under NAFTA, the RVC requirement for automobiles, light trucks, engines and transmissions was 62.5 percent, and for all other vehicles and automotive parts, the RVC requirement was 60 percent.

Under the USMCA, the RVC requirements for motor vehicles are significantly increased. For new passenger vehicles and light trucks, the RVC requirement will be 75 percent, and for new heavy trucks, the RVC requirement will be 70 percent. Importantly, the USMCA provides a three-year transition period for North American producers to meet these new requirements.

The USMCA also establishes new RVC requirements for parts of such vehicles. For example, the RVC requirement for core parts for use in passenger vehicles and light trucks will rise to 75 percent (NC method) and 85 percent (TV method) by 2023. In contrast, the RVC requirements for principal parts for use in heavy trucks will increase to 70 percent (NC method) and 80 percent (TV method) by 2027.

In addition to the general RVC changes for vehicles and parts, the USMCA also imposes new RVC requirements relating to the steel and aluminum that is used in vehicles. Specifically, the USMCA requires that 70 percent of a vehicle’s steel and aluminum must originate in North America and that the steel must be melted and poured within North America to be deemed to be originating from there. As is the case for the general RVC requirements for motor vehicles, there is a phase-in approach for the RVC requirements relating to steel and aluminum.

The USMCA also sets forth labor value content (LVC) requirements pursuant to which specified percentages of vehicles must be produced with “high-wage” labor (i.e., an average production wage rate of $16 per hour). Like the RVC requirements, the LVC requirements vary depending on the kind of vehicle and will involve phased-in approaches. For example, the LVC requirement for passenger vehicles will initially be 30 percent, and subsequently, after three years, the requirement will increase to 40 percent. In contrast, for light trucks and heavy trucks, while the initial LVC requirement is the same as for passenger vehicles (i.e., 30 percent), the LVC requirement then increases to 45 percent after three years. In all cases, the methodology for calculating the LVC is complex and involves analyzing (i) material and manufacturing expenditures; (ii) technology expenditures; and (iii) assembly expenditures.

USTR Accepting Petitions for Alternative Staging Regimes

Recognizing that complying with the USMCA’s new RVC and LVC requirements will be quite challenging, the USTR has recently announced procedures for North American producers of passenger vehicles or light trucks to submit petitions to request an alternative to the standard staging regime for RVC and LVC compliance set forth in the USMCA. Such petitions, which must be submitted to the USTR by July 1, 2020, require that applicants provide a “credible plan” for meeting the alternative staging regime being proposed and supporting data. This new opportunity and what companies need to do take advantage of it will be discussed in greater detail in a subsequent Alert and during a webinar that Duane Morris will be holding on June 16, 2020. In the meantime, more information about this new opportunity can be found in a notice that the USTR has recently published.

For More Information

If you would like further information about this Alert or other matters pertaining to the USMCA, please contact Geoffrey M. Goodale, Michael E. Barnicle, any of the attorneys in our Government Contracts and International Trade Group, any of the attorneys in our Transportation, Automotive and Logistics Industry Group or the attorney in the firm with whom you are in regular contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.