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USMCA is in effect, ready or not

John Irwin, Automotive News Canada
August 3, 2020

Automakers and suppliers face a “heavy lift” in adapting to new North American trade rules during a health crisis that has roiled the global economy.

“It’s literally unprecedented to learn and comply with such a complex and new set of rules and origin in less than 30 days, let alone during a pandemic,” said Karin Muller, director of customs compliance and trade governance at Magna International Inc.

The United States-Mexico-Canada Agreement (USMCA), which replaced the North American Free Trade Agreement (NAFTA), went into effect July 1 after years of negotiations. Broad outlines of the agreement have long been known, but the industry received the pact’s uniform regulations only on June 3.

The auto industry had lobbied all three countries to extend the starting date to Jan. 1, 2021, to allow more time to understand the rules and make adjustments to ensure compliance, but to no avail.

“Usually, we’d have a year and a half until implementation, but we just got the uniform regs,” said Flavio Volpe, president of the Automotive Parts Manufacturers’ Association (APMA).

“Companies will be playing a bit of catch-up for a few months, but it’s not going to trip up anybody.”

BIG DEAL IF YOU’RE SMALL

Kristin Dziczek, vice-president of industry, labour and economics at the Center for Automotive Research in Ann Arbor, Mich., said that while automakers and larger suppliers might have a good grasp of the rules, smaller companies with fewer resources could struggle for certification and compliance as they adjust.

“There’s a lot of small companies that are just going to learn when the rubber meets the road here exactly what the certifications are going to look like. Some of the provisions are brand new and haven’t been done in any other trade agreement. It can’t be cribbed,” she said.

“There’s no boilerplate for how to do this. They’re going to have to start all over from scratch over the course of just a few weeks. Nobody’s ever complied with a labour-value rule or a steel-aluminum rule before.”

Indeed, the USMCA introduces new rules on labour and when fully implemented, 70 per cent of steel and aluminum in a vehicle must originate from the region for it to be exempt from tariffs, which was not a NAFTA requirement.

The steel and aluminum requirements come as the Trump administration threatens to impose new tariffs on Canadian aluminum, casting a shadow over the efforts of companies to navigate the new trade environment.

PAY A NEW PAIN POINT

By 2023, at least 40 per cent of a vehicle’s value must be made with labour making at least US$16 (about $22) an hour. That rises to 45 per cent for pickup or cargo vehicles. There was no labour provision in NAFTA.

The rules will be phased in, beginning at 30 per cent of a vehicle’s content this year, 33 per cent in 2021 and 36 per cent in 2022.

Likewise, the requirement that 75 per cent of a vehicle’s value must be sourced regionally does not come into play until 2023. It stands at 66 per cent this year and rises by three per cent a year until then.

On paper, the labour rules apply to automakers and not suppliers. But if a vehicle is assembled at a factory that does not pay its workers at least US $16 an hour, automakers are likely to approach suppliers to figure out how to ensure that at least 40 per cent of the parts in the vehicle are made by workers at supplier plants earning that much.

The uniform regulations brought clarity to how companies can calculate labour content. Magna’s Muller, who spoke during a June APMA webinar, said the hourly rate applies only to wages and cannot include benefits, overtime pay or profit sharing. The rules also clarified which workers count toward the labour requirement.

“They’ve come a long way in defining what ‘direct production workers’ are,” said Rob Wildeboer, chairman of supplier Martinrea International Inc.

“It’s much more realistic than the original interpretation of it, where someone had to be on the line and touch the part. That’s not how parts are made.”

PAPERWORK PUZZLE

In the short term, one challenge for companies might be figuring out how new paperwork should be filled out. Under the USMCA, companies need to fill out new documents that differ from NAFTA documents, which will no longer be accepted. Indeed, speakers at the APMA webinar repeatedly stressed that because the USMCA is a new trade deal, there’s also new paperwork.

“The only point of confusion” for suppliers, Volpe said, “is, ‘Can I use my NAFTA materials?’”

In the early days of the pandemic, countries were expected to take different approaches to enforcement. Joy Nott, a partner in trade and customs at KPMG in Canada, said the federal government has tried to be flexible with companies in all matters of enforcement, while Mexico has signaled that it will be more stringent in enforcement from the get-go.

The United States has said that over the next six months, it will offer “maximum flexibility” with companies as they adapt to the new rules.

“Maximum flexibility does not mean that they aren’t going to enforce whatsoever,” Nott said. “It just means that they recognize there are challenges, and they’re willing to work with companies to give people a little bit of time to let people get the data that they need.”

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