Finally, some certainty. Although the USMCA still must be ratified and passed before it can go into effect on January 1, 2020, as expected, its text has produced clarity and stability on the modifications and future of the Automotive Trade between the United States, Canada and Mexico.
Besides that USMCA will continue to use the system of specific rules of origin for the automotive and the auto parts industry, the automotive and auto parts trade provisions have been significantly impacted as follows:
REGIONAL VALUE CONTENT (RVC)
1. RVC for vehicles increases from 62.5% to 75%
2. RVC thresholds for three categories of automotive parts:
Core Parts (Engine, transmission, body & chassis, axle, suspension, steering, advanced batteries): 75% RVC. There will be a transition period of 3 to 5 years. Must be originating for the vehicle to be originating.
Principal Parts (Tires, glass, pumps & compressors, A/C, bearings & bearing housings, electric motors used as primary source of propulsion, electric motors for electrical variable transmission, electromagnets, starter motors & generators, bumpers, safety belts, brakes, road wheels, radiators, mufflers, clutches, airbags, seats, and parts of seats): 65% RVC.
Complementary Parts: (Pipes, catalytic converters, valves, taps & cocks, electric motors and universal AC/DC motors not exceeding 37.5W, DC motors and generators not exceeding 750W, other batteries, distributors & ignition coils, electrical lighting, windshield wipers/defrosters, sound recording/reproducing apparatus, switches, insulating wiring sets, headlamps, electronic instruments & measurement equipment): 65% RVC.
3. New RVC for North American Steel and Aluminum at 70%.
LABOR VALUE CONTENT REQUIREMENT (LVC)
New Labor Value Content requirement (LVC)
40% of passenger vehicle must be made by Hourly wage (production/trades/temps) above $16 USD/hour (at least 25% from materials & manufacturing content).
45% of pickup trucks & Cargo vehicles must be made by Hourly wage (production/trades/temps) above $16 USD/hour (at least 30% from materials and manufacturing content).
Can average within one country across class, model, or plant.
Up to 5% credit toward LVC for assembling the vehicle in high-wage region in North America.
Up to 10% credit toward the LVC from R&D and IT work done in the region.
SECTION 232 OF THE TRADE EXPANSION ACT OF 1962
Mexico and Canada also negotiated side agreements (letters) which mostly exempt light vehicle and auto parts exports to the United States from potential national security tariffs under Section 232 of the Trade Expansion Act of 1962.
Consequently, each of these countries can send up to 2.6 million passenger vehicles per year, as well as unlimited number of light trucks. $32.4B (for Canada) and $108B (for Mexico) in parts will be exempt from any U.S. imposed Section 232 tariff on imported vehicles or parts.
Mexico, additionally negotiated provisions exempting non-USMCA automotive exports from potential increases in the (MFN) rates of the United States. As a result thereof, 1.6 million units (vehicles) which are non-USMCA originating under the new scheme, will be grandfathered in at the current 2.5% tariff rate for passenger cars and automotive parts and 25% tariff rate for pickup trucks and cargo vehicles.
Currently, based on calculations by the Mexican Government, approximately 780,000 vehicles (32% of Mexico´s current vehicle output, which is below the 1.6 million cap) are not originating under the new USMCA Rules of Origin.
EXPECTATION
As a result of the new scheme of automotive trade in the North America region, we would expect automakers and suppliers to move more work to this region. Additionally, for some sectors in the industry such as light vehicles and automotive parts, we foresee a raise in the productions costs, which would eventually result in the increase of the consumer prices.
Should you have any questions or comments regarding the foregoing, please do not hesitate to call your usual contact in the firm.
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