iWhen compared to general tariffs (MFN) of typically 2.5% and higher, the USMCA preferential rates contribute to cost reduction priorities for executives. However, the USMCA qualification rules for most automotive goods are determined by a system based on “core,” “principal,” and “complementary” parts that are not found in any other trade agreement and for which the US regulatory agencies have provided little to no guidance.
In many of our previous alerts, we identified the advantages that the USMCA offers automotive companies, automakers, and suppliers alike. The calculation on how best to capture those benefits lie in many cases in the USMCA “regional value content” (RVC) rules, which hiked the percentage of RVC up to 75% of the net cost, requiring assemblers and parts suppliers to bump up their North American content. Recognizing that assemblers would need to significantly adjust their global supply chains, government negotiators from the three North American countries granted certain original equipment manufacturers (OEMs) a postponement period under the Alternative Staging Regime (ASR) to ready their products for that increase in RVC.
Why 2024 Is Important
These “alternate staging regimes” are set to expire after the fifth year of the agreement, which starts on July 1, 2024. This will continue to increase pressure from OEM customers on their entire supply chain to demonstrate USMCA RVC requirements and lead to heightened regulatory scrutiny on US operations.
Readers will also recall that the USMCA includes a sunset provision. This provision requires renewal consideration every six years, with a 16-year sunset clause. The USMCA can be extended for an additional 16-year term during the six-year reviews. As noted above, July 1 will mark the beginning of the fifth year of the agreement, setting an early stage for Ottawa, Washington, DC, and Mexico City to contemplate USMCA changes in key provisions of the pact. This approaching timeline underlines the importance for executives to consider participating in the public comment period offered by the official notices described below.
The Executive Branch and US Congress will be taking a hard look at the USMCA throughout 2024 and 2025. The process continued late in 2023 when official notices from the Office of the US Trade Representative (USTR) invited public comments on the operations of the USMCA with respect to the automotive industry. Comments are due January 17, 2024.
In addition, the US International Trade Commission (ITC) announced the launch of an investigation into the economic impact of the UMSCA Automotive Rules of Origin that aims for completion by July 1, 2025.
What’s Next?
By the end of 2024, US agencies will be well on their way to completing the process announced in these USTR and ITC notices. However, there still appears to be no movement on issuing the final USMCA Domestic Regulations. This would leave the industry without the guidance that they have been seeking since the interim regulations were published in July of 2020.
As product advancements rapidly occur for electric vehicle (EV) and hybrid platforms, so do uncertainties surrounding how the rules will apply to those parts developed for these vehicles. For example, how should e-axles be categorized under the USMCA? Given that e-axles cover a number of similar (but not identical) products in different tariff classifications, USMCA qualification of an e-axle could very well hinge on whether a particular e-axle is considered a traditional axle or another automotive part (e.g., motor, transmission, etc.).
