One unexpected effect of the coronavirus outbreak is that the domestic auto industry is experiencing difficulty adjusting to the new rules being rolled out under President Trump’s United States-Mexico-Canada Agreement because the industry isn’t sure it’ll actually be able to comply with them anytime soon.
USMCA will require the industry to adjust those supply chains in a myriad of ways. The problem, trade groups say, is that the global pandemic is causing so much chaos along those chains that they can’t check to see whether the supply chains fit under the new rules — and they won’t be able to for a while. Just keeping production going and ensuring employees don’t get sick has proved a significant problem. Trade associations are asking the White House to delay implementing the new rules.
The administration set June 1 as the compliance date, and the trade groups say they cannot comply in that time frame — especially since the White House and U.S. trade partners haven’t told them exactly what to do yet. While the administration has released a draft version of the rules, they haven’t been finalized.
“We are in the midst of a global pandemic that is significantly disrupting our supply chains, and the industry is throwing all available resources into managing production through this crisis for our employees and for the broader US economy,” a coalition group wrote in a March letter to the White House. The group included the American Automotive Policy Council, the National Automobile Dealers Association, the Motor and Equipment Manufacturers Association, and the American International Automobile Dealers Association. “Even if it were reasonable to divert our attention to USMCA compliance, the United States, Canada, and Mexico have yet to issue, even in draft form, the uniform automotive rules of origin regulations.”
However, the administration is loath to delay USMCA any further than it already has, having spent most of 2019 struggling to get it through Congress and the final ratification getting delayed until March due to political opposition in the Canadian Parliament. The U.S. Trade Representative’s office did not respond to request for comment.
USMCA doesn’t actually change much of the deal it replaces, the 1993 North American Free Trade Agreement, but the one area where it does is the auto sector. NAFTA had only one section covering that industry, a requirement that 62.5% of a car’s parts be sourced from North America in order for the vehicle to be duty-free. USMCA hikes that share to 75% and requires that at least 40% of the parts have to be made by a labor force paid at least $16 an hour. There are also numerous additional rules regarding how to comply with those two requirements.
“It’s a complete rewrite of the rules that have governed auto sales in North America for the last quarter-century,” said a top trade association official. “NAFTA was just the one rule. The USMCA has about a half a dozen additional rules that come into effect.”
The point of the provisions is to force companies to shift their supply chains from abroad to the U.S. and to make Mexico less attractive to manufacturers by raising its labor costs through the $16 wage provision. But the devil is in the details, and trade groups are trying to figure out where exactly the lines have been drawn since the administration has yet to release that fine print.
For example, who in a factory actually qualifies as labor being used to make a car? Is it only the people on the assembly line? Or does it include the engineers overseeing the production? Trade groups argue engineers are directly involved in producing the cars. “To us, the idea that you actually have to touch the product on the assembly line seems a bit arbitrary,” the official said. “Some parts aren’t ever touched by anyone but are made by robots. Do the people who man the machines count?” Union groups fought extensively during the negotiations to ensure that only assembly-line workers be covered, arguing that anything short of that circumvented the rule. A United Auto Workers spokesman declined to comment on the trade groups’ request for a delay in complying with the USMCA, however, saying the union hadn’t formulated a position.
To meet the 75% parts requirement, at least 70% of the steel used in those parts must be not only from North America but also specifically melted and poured on the continent. Is that the case with the steel supply chain companies are using? Trade groups say they don’t currently know because they never had to know before.
Companies that want to ensure their supply chains meet the new regulations, therefore, have to do extensive checking of the facilities. Even if the administration released the final language of the deal immediately, the virus has resulted in closures at various points all along supply chains, so checking whether the chains are compliant can’t be done quickly.
Trade association officials couldn’t even estimate how much of their supply chains had been closed by mid-March, pointing to the rapidly changing nature of the crisis. The automakers themselves have limited production in North America, with Honda announcing a one-week closure in mid-March while Ford, General Motors Co., and Fiat Chrysler said they would idle facilities on a rotating basis. The limited production means the supply chains will likely shut down for the time being as well.
Lawmakers argue the auto industry should get a break. “I think the administration would be wise to reconsider and show some flexibility for the sake of our economy because one of the really big winners out of USMCA is the auto industry,” Senate Finance Committee Chairman Chuck Grassley, an Iowa Republican, told reporters in March.
