USMCA Auto Guidance Waiting for Panel Decision, Expert Says

"We know they’re going to have to do something after the September decision, whichever way it goes," Ujczo said, referring to the deadline for the panel report. "There’s already rumbling that the Mexican and Canadian position is likely to prevail. No matter which way this lands, we’re going to have to see what the implications are and how the U.S. reacts to that. Everything’s really been in a holding pattern until we get that decision."

He said if the U.S. position prevails, Canada and Mexico -- and the industry-- will have 45 days to figure out how to adjust, and Ujczo predicted there would be changes to the alternative staging mechanism, which gives automakers up to five years, for certain models, to reach the new stricter rules of origin.

The dispute is primarily over whether, as under NAFTA, once a part is deemed originating, its full value is credited for the overall regional value content for the vehicle (see 2106180027 and 2201070004). The U.S. says for core parts and super core parts, only the North American content should be included to get to the vehicle's regional value content. So if an engine is 80% Mexican, then that's the amount that is calculated.

But Ujczo said that the fate of roll-up, as the NAFTA way of calculating value is known, is not the only issue where the three countries differ. He said that even if the U.S. loses, there will need to be a dialogue about what that means for guidance on steel, how rules of origin should operate for electric vehicles and on roll-up.

He said that the Office of the U.S. Trade Representative's position is really about how parts certification and vehicle certification intersect more broadly. He gave the example of steel certification. You currently submit Schedule S about how much of the steel in the car or truck is from North America. But how do you determine if the steel is originating in the transition period before the steel has to be melted and poured in North America?

He gave the example of a chassis -- a parts maker buys flat rolled steel from a Mexican mill, and forms it into a vehicle chassis. Now the chassis is Mexican. Is that enough? Do you have to have a purchase order as well from the parts maker to the mill?

The mill that flat rolls steel takes steel ingots and slabs that are frequently imported from South Korea, Japan or Germany, depending on the home country of the automaker. Will that not be counted as Mexican steel before the transition to the melted and poured standard?

How much of the steel going into Mexican plants is imported from overseas as opposed to from the U.S.? "The reality is, nobody knows. The Mexicans don’t segregate their steel market," Ujczo said. "I’m not sure how that’s going to be interpreted by U.S. CBP. Nobody’s making any noise about it until we see this decision. It’s something we’ve got to keep an eye on."

But, he said, it's possible the panel will rule narrowly, just on the issue of the regulations for core parts, passenger vehicles and light trucks.

Ujczo said the recent report from USTR about how auto rules of origin have affected the North American industry (see 2207050028) spent a lot of time talking about the alternative staging regimes, which makes sense. He said some of the ASRs were granted because of promises the companies made to invest in North America for electric vehicle batteries or other new facilities.

He said if the U.S. position on roll-up wins, he thinks the number of models that will need a longer phase-in to meet the 75% regional value content will grow. But it's hard to know how big of an impact it will have, and on which firms, because a lot of what was in the submissions is business confidential information.

He said there is a way to amend the ASR for companies that already have submitted plans, but there's no way for General Motors or Lucid or Rivian to get a plan at this point.

Ujczo said he didn't necessarily think that not having roll-up would lead automakers to abandon USMCA benefits for cars, which only face a 2.5% tariff at the border. But, he said, some of the consequences of USMCA have already surprised those in the field.

"Nobody ever expected wages in Mexico to rise to $16 an hour," he said, but parts suppliers to Honda and Toyota tripled their wages, because the Japanese automakers who were their customers felt that was cheaper than switching to American suppliers or moving operations.

Ujczo said the report is optimistic, in his view, because it shows the government is listening to industry's concerns about compliance difficulties, and it suggests there could be flexibility as the industry adjusts to producing more electric vehicles and the battery supply chain takes time to build out.

Ujczo noted that there have been virtually no CBP rulings in the automotive space under USMCA in the first two years of the pact. The last one was on ignitions for heavy trucks, which went against Mitsubishi Electric, the party that asked for the ruling (see 2110080032).

"No. 1, we’re not asking for them," he said. "And b., they're not giving them anyway."

He said that CBP "has taken a facilitative role in its enforcement responsibilities and that’s what’s been needed in the last few years. I don’t see that continuing in perpetuity."

He said neither CBP nor Canada's and Mexico's customs agencies have "been cracking down on folks who have been making a good-faith effort to comply."

But although Ujczo said "NAFTA was dramatically underenforced," he thinks USMCA enforcement will kick into high gear in the last three or four months of this year and into next year.

Lately, Thompson Hine has been fielding more calls about USMCA, not just in autos, as he thinks companies that put this kind of compliance on the back burner as they struggled with supply chains during the pandemic are starting to realize they need to track more information for either their customers or CBP.

"The idea that certification is a verb has not taken hold throughout the supply chain and that keeps us up at night," he said. He said that under NAFTA, you just filled out a form saying you qualified for benefits. Now, particularly in the auto industry, it's an ongoing process of tracking payrolls and metal inputs.

He said the rapid response actions have gotten a lot of attention in the auto industry, and he has heard rumors there will be two more cases brought by the U.S. later this year.