USMCA
Changes in the USMCA for the American Automotive Sector
The negotiation of the USMCA was framed in topics of deep discussion due to the position of the United States’ government representatives feeling in disadvantage; 4 of the 7 topics that took harder negotiation were:
- Rules of Origin
- Automotive Sector
- Dispute Settlement
- USA’s trade deficit
In addition, the Democratic Representatives added to these issues those corresponding to Labor Cost, Environment and Intellectual Property.
USMCA Impact On The Automotive Production Industry
Our automotive production industry is practically linked to our trade partners in North America and, given the current economic situation in our country, we will depend even more on exports to maintain our installed capacity.
Something that is not so well known is that the export trade value of auto parts is greater than the export trade value of cars; and these new requirements generated by the USMCA apply in the same way regardless of whether the car is assembled in Mexico, the United States or Canada. That is, the OEMs will require the T1 to ensure compliance with the new provisions and, therefore, the entire supply chain will need to be realigned.
The challenge is to comply with the Regional Value Content. Therefore, the recommendation for T1s is to have a team dedicated to carefully analyze the requirements specified in the 170 pages of the automotive sector of the USMCA, and to implement those requirements in their supply chain; instead of leaving it in the hands of managers with other responsibilities such as those related to Foreign Trade, Finances, Production, and even General Management. The justification to make this investment in human capital is because a specialization is required so to know the tariff classifications of the products and which are their restrictions under the USMCA.
Meeting USMCA Automotive Production Requirements
With the entry into force of the USMCA, the automotive chain must meet the 3 main requirements, and their increases in percentages:
- Regional Value Content (RVC) in cars and trucks
- Steel and Aluminum Supply
- Average labor cost of $16 USD/hr
If these requirements are not met, although OEMs can request a transition regime, the import tariff to the USA would be 2.5%.
Impact of Increased Regional Value Content
It is expected that the content of original parts from North America, in the total cost of parts of each car, shall increase up to 75% in the next 4 years. This means that each assembler’s supply chain, in order to sell tariffs free within the USMCA, region, shall include many more raw materials, components, and systems originally produced within the region.
The percentage of systems and components contained is calculated based on the cost of the raw materials original from North America, with respect to the transaction cost of the entire system. There are two ways to calculate the Regional Value Content: one formula is based on the transactional value, and the other on the total cost. Both can be applied, so you must analyze which one is the most suitable to apply consistently throughout the whole supply chain, it is not advisable to be changing the formulas.
Focus Areas for Regional Content Requirement (RVC)
The focus of the Regional Content Requirement (RVC) goes on essential systems and key components in the car. The essential systems, to which increases from 66% to 75% will apply, with annual increases, are:
- Axes
- Engines
- Chassis and Bodywork
- Suspension and Transmission
- Batteries, including lithium batteries
The main components requiring contents increasing their RVC from 62.5% to 70% are:
- Interiors, Seat Belts, Airbags, Seats
- Control Panel, Air Conditioning Parts
- Bearings, Brakes, and Bumpers
- Fuel supply parts
- Exhaust transmission parts
- Wheels and Tires
- Electric Motors
- Crystal Assemblies and Parts
We need to be aware that if you do not produce these systems and/or components, but your client does so in North America, then this rule also applies to your product.
Challenges for OEMs
The main challenge is to the OEMs, because they are the ones who shall finally prove the compliance of regional content percentage in the car. Depending on this, they will pay or not import tariffs to the United States and Canada. To overcome this challenge, OEMs must:
- Immediately replace global purchases with regional ones
- Finance tools and dies to their suppliers in North America
- Accelerate their components and systems release procedures
Importance of Addressing Labor Cost
The other relevant topic to which special attention should be given, in addition to the Regional Value Content, is the one related to the LABOR COST. The Chapter on Labor Cost is subject to the Rapid Response Mechanism for Dispute Resolution of the USMCA, and it includes addressing breaches related to free association and the right to collective bargaining in Mexico.
This forces companies to comply with the Labor Reform and ensure the freedom of the employees to choose their union membership, the transparency of the union registry, as well as of the Collective Contracts. Taking as challenges the implementation of new obligations of the Trade Union Associations. The members of the Unions, Federations, and Confederations have the:
- Right to free affiliation
- Right to free participation within their groups
- Right to draft the Statutes and Regulations
- Right to freely choose their representatives
- Right to organize its administration
- Deadlines defined in the transitory articles of the same law
The expectation regarding the percentage of the labor cost of a car equivalent to the minimum of $16 USD/hr, gradually increases from 30% in 2020 to 40% in 2023, being this a weighted percentage of manufacturing in the 3 countries.
For this reason, it is extremely important to have a specialized team within the automotive and auto parts sector, that specializes in the knowledge, analysis, and implementation of the new provisions; those doing it efficiently will have an impressive growth opportunity in a very challenging economic period.
Source: By: Guillermo Fernández de Jáuregui
