USMCA Moves From Politics to Painstaking Compliance in 2020
Even though the U.S.-Mexico-Canada Agreement has not finished its ratification path through Canada and the U.S. Senate, industry is already looking to how CBP will make the changes a reality, perhaps as early as May 2020. “This is going to move out of the Beltway political sphere and really get into the practical, everyday pain in the neck, painstaking trade world,” said Dan Ujczo, a partner at Dickinson Wright and a customs and trade lawyer who specializes in North American trade. A CBP official said last month that agency discussions for how to implement some USMCA provisions are underway (see 1911070015).
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Ujczo expects the immediate scrutiny to be on agricultural products and textiles -- though he acknowledged there's already heightened scrutiny on Mexican manufactured imports that contain Chinese inputs. “That’s where we spend our day job when we’re not talking about USMCA,” he said. He praised CBP for “common sense approaches to some of its rulings” on what is substantial transformation in Mexico. But, he said, the problem is that clarifying for the product at hand “is changing their reasoning in other areas.”
He said the uniform regulations, which show how CBP is interpreting the new textile and auto rules of origin, are supposed to be done by May, even if the most dramatic changes to rules of origin, in the auto industry, have a three-year transition period at a minimum.
The auto supply chain cannot start classifying parts until they know what the regulations are, he said. “We have to classify every single component. Is it a core part? Super core part? Principal parts, complementary parts. Each one of the super core parts -- which include transmissions, suspension systems, steering systems, engines, and vehicle bodies -- have to be at least 75 percent North American for the vehicle to meet the rule of origin, even if the overall content of the car was 75 percent North American without one of those systems qualifying.
The good news for the auto industry is that unlike under NAFTA, CBP doesn't have to approve the certification every time a part crosses a border. But even documenting this once “in and of itself is an administrative headache,” Ujczo said.
The Office of the U.S. Trade Representative is offering a five-year transition period if automakers show how every car and light truck they assemble in North America will meet the higher 75 percent regional content and the 40 percent to 45 percent labor-wage content. If carmakers don't choose to do that, vehicles that are assembled in the U.S. could face a 6.1 percent tariff in Canada if they don't meet the standards, but given that the total number of U.S. exported vehicles to Canada is 47,000, and some of those would meet the standards, the duty exposure might not be worth it. The USTR said “nearly every automaker” in North America has already shared the kind of information that USTR would need to grant the two-year extension, but Ujczo said automakers are crunching the numbers right now to see if they'll ask for the extension.
After the transition is done, Ujczo said, the wage-rate content rule in particular will not be enforced by CBP. “Where we're going to see the biggest change is the bidding programs for these components,” he said. Because even if there were automakers who chose not to certify U.S.-assembled vehicles as meeting the $16/hour content, components never go into just one automaker's vehicles. So if a component is going into a truck that's assembled in Mexico, the math on how to meet the rules of origin there will influence how it's made for the U.S., too.
The nameplates -- the GM, Nissan and Mercedes brands -- won't be the ones most affected, it will be suppliers, he said, and not just Lear, Magna and other first tier suppliers. Because when a Lear wins a bid, then they bid out to their suppliers. Ujczo said, “At every stage of the supply chain, people are going to say I can no longer bid 40 percent of this of Mexico, how am I going to bid it?”
“Nothing’s going to pull out of Mexico. That idea’s just a myth,” he said. But it will change the location of auto parts manufacturing. Currently, aside from engines, because of their weight, companies are moving toward sourcing as much as they can from Mexico, and many of the items in Mexico are heavy with Asian inputs, and companies worked to figure out what is the minimum amount of work that could be done in Mexico to get that made-in-Mexico judgment from CBP.
Now, Ujczo said, some companies will open plants in Georgia, South Carolina and other right-to-work states to avoid the complicated rules of origin. And, he said, “it's going to stop the downward migration of the rest of the supply chain because right now we need at least 40 percent of those folks to be from the U.S. or Canada.”