The year 2020 was a wild and wooly one, by any measure. A pandemic brought the world to a halt, and many pockets of hurt still remain; U.S. presidential politics were on dizzying and dazzling display; deadly wildfires scorched wide swathes of the western United States; and mysterious monoliths began cropping up around the world. And that wasn’t even the half of it.
In the midst of this craziness that was 2020, a not-so-crazy event occurred: a new trade agreement also entered into force. It was, of course, the United-States-Mexico-Canada Agreement, which revised and updated the long-standing North American Free Trade Agreement. Former President Donald Trump, who had been highly critical of NAFTA, made renegotiating the trade pact a priority early in his presidency. USMCA took effect July 1, 2020.
“This agreement cements us as members of the same team,” said several North American business associations, including the U.S. Chamber of Commerce, on the July 1 effective date in a joint statement. “The work does not stop now.”
And indeed it has not. Nearly eight months in, USMCA implementation and challenges remain a work in progress, particularly (from a manufacturing perspective) for the automotive industry, which faced the most significant changes between the two trade agreements, most agree.
The challenges were not unexpected. “The auto industry— our region’s largest manufacturing sector—will have to comply with hundreds of pages of new regulations implementing strict content requirements,” the joint statement noted. “New rules in a number of other areas … will also present compliance challenges.”
With the world now firmly footed in 2021, IndustryWeek set out to get an update on the work in progress that is USMCA. Here is what we found.
A Fix and New Faces
Let’s begin with a review of important changes since USMCA’s July 1 effective date. They include:
Changing of the Guard in Washington: While USMCA was signed, sealed and delivered during the Trump administration, it is the Biden administration now at the helm. At press time, the president’s nominee as the next U.S. trade representative, Katherine Tai, had yet to be confirmed, although hearings were imminent. A lawyer who until recently was lead advisor to the chairman and Democratic members of the Committee on Ways and Means, Tai is well-versed in the USMCA, having participated in development of the agreement’s labor standards.
The USCMA drew bipartisan support—and as a result, this changing of the guard has not drawn significant public concern. Indeed, “I don’t think there’s a lot of appetite to be revisiting (USMCA),” says lawyer Gregory Husisian, chair, International Trade & National Security Practice, at Foley & Lardner. “I think the focus more is going to be: When we have future free trade agreements, how are we going to update and move them into the future?”
A Technical Correction: At the end of the year, President Trump signed an omnibus spending bill that included legislation to correct what had been called by a host of business organizations “a drafting error” in the United States– Mexico–Canada Agreement Implementation Act. The error meant that companies could not claim refunds of the post-importation merchandise processing fee. Failure to fix the language, which exists in other free trade agreements including NAFTA, would have resulted in “the payment of millions of dollars of fees on imports into the United States,” according to a letter sent by those same business organizations to the U.S. House Committee on Ways and Means and the U.S. Senate Committee on Finance last July.
The Motor & Equipment Manufacturers Association thanked trade leaders following passage of correcting legislation, with President and CEO Bill Long commenting in a January statement: “This change will benefit the bottom line of each MEMA member that imports from USMCA nations during this time of a significant liquidity crunch resulting from our national public health crisis.”
Many Moving Parts
Now, back to the work in progress. The USMCA changes impacting the automotive industry read almost like a math equation, and, indeed, will require lots of calculating by affected companies. For example, rules of origin requirements boosted to 75% (up from 62.5%) the amount of North America content required for new automobiles and light trucks to ship tariff-free among the three countries, and 70% of steel and aluminum content must originate in North America. A new labor component (which did not exist in NAFTA) outlines wage requirements that 40% to 45% of auto content must be made by workers earning at least $16 per hour.
Those are no small changes, particularly given that many automakers have been perfecting their supply chains since 1994 to comply with NAFTA requirements—and given that their supply chains are both immense and complicated. Moreover, “automotive companies are often on four or fiveor six-year cycles. … . “For them to just change things quickly is often not possible,” says Husisian. “There are so many moving parts.”
Indeed, the USMCA acknowledges the complexity of the supply chain and provides for a three-year transition period (known as a standard staging regime) for producers of passenger vehicles and light trucks that gradually increases the regional content requirements and labor minimums. Alternative staging regimes extend the transition to five years or more. According to the USTR website, 12 automakers including FCA North America, Ford Motor Co., Honda North America and Tesla Inc., have received approval for alternative staging regimes.
Moreover, a U.S. Customs and Border Protection official told reporters last June that its agency would apply an “informed compliance period” for the first six months of 2021, according to Reuters. In short, the agency will focus on helping companies fix errors rather than leaping to punitive actions. More recently, MEMA’s Ann Wilson, senior vice president, government affairs, echoed the sentiment. “CBP has been very clear that they will continue to work with those who are operating with the best of intentions to make sure that compliance is 100%,” she says.
Nevertheless, the new trade agreement is in force. Is it too soon to recognize any impact on the auto side of the equation? Kevin Dempsey, president and CEO of the American Iron and Steel Institute, which represents the interests of American steel producers, has said that he expects the domestic steel industry to benefit from USMCA, especially with increased demand from the automotive sector due to the new rules of origin, which include a steel content component.
Indeed, “early indications are that it is bearing fruit, that companies are seeing increased inquiries from automotive customers,” he says.
Nevertheless, it’s too soon to gain a sense of how much USMCA is impacting steel demand, Dempsey says. He points out that the trade agreement took effect in a year upended by COVID-19. Automotive demand nearly ground to a halt fairly early in 2020 as a result of the pandemic, which in turn spurred a huge drop in demand for automotive steel. Those markets began to recover in the second half of 2020, right around the time that USMCA went into effect.
Disentangling cause and effect in demand given those circumstances “is going to be a little bit difficult,” he says.
MEMA’s Wilson believes that “some of the implications of (USMCA) are not going to be felt until we move into the second year,” once there is more visibility into the alternative staging regimes. Petitions for the alternative regimes requested significant, detailed plans from automakers that address the next five years. Details of the approved plans have not been revealed, but obviously they will impact the supply base.
Kristin Dziczek also highlights the alternative staging regime as an area of interest. The vice president of research for the Center for Automotive Research notes that automakers’ plans can change multiple times, even in the same year. “As an observer of the industry, I just wonder about the process in general, because you’re making plans for five years out,” she says. “In 2015 we had no idea about a pandemic in 2020.”
As for USMCA preparations to date, Wilson says MEMA members have invested significant resources—financial, time and people—to comply with USMCA requirements. “And keep in mind that most of our members, the senior people on their trade and logistics teams, all they’ve ever known is NAFTA,” she says. There are some new elements to USMCA that "they have had to become familiar with and to become expert with very quickly.”
Foley & Lardner’s Husisian said the biggest issues his firm has observed relate to the complexity of the new rules, the length of time and effort required to get full supply chain information to support the new regional content calculations, “and the lack of guidance regarding the many gray areas in calculating originating content.”
The lawyer noted that some companies may also be navigating Section 301 tariffs on goods from China or Section 232 tariffs on imported steel and aluminum even as they navigate USMCA’s new requirements. Given what he described as the late issuance of guidance related to USMCA, Husisian says, “It adds up to a lot of unexpected attention to customs issues happening at the same time.”
Ultimately, it will take manufacturers years to gain expertise into navigating the USMCA, just as it did with NAFTA. But for suppliers in the automotive supply chain, Husisian offers counsel.
The trade lawyer advises companies to involve all of their supply chain partners, as well as all of the compliance stakeholders within the company, as early as possible. “It’s not something that you can do quickly or on your own, particularly if you have a complicated supply chain,” he says. “It often requires drawing together a lot of internal resources—people in procurement, people in sales, people in accounting; your logistics people. It’s really a long-range goal that can cost the company a lot of money if they don’t get it correct.”