Webinar Explores Intricacies of USMCA Auto Rules of Origin
The complexity of the auto rules of origin in both NAFTA and the U.S.-Mexico-Canada Agreement are the result of what one observer calls the "political preoccupation" with retaining domestic auto manufacturing. Eric Miller, president of Rideau Potomac Strategy Group, noted that in NAFTA, that resulted in the tracing list, and in USMCA, that resulted in the labor value content and higher North American value targets, including for specific parts.
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While there are many variations of how to do averaging in NAFTA, it's not yet known how averaging will be done to meet these standards under USMCA, he said. "That is something that is still very much in negotiation."
Moises Zavaleta, Mexico’s former USMCA negotiator for rules of origin, spoke on the same Dickinson Wright webinar May 14 with Miller, and said there are still flexibilities for manufacturers. For instance, there are seven core parts, and a car brand could average the regional value content of all seven to meet the standard. So if one part was 100% North American, one was 80% and one was 60%, the car could still qualify.
He said that for a core part -- for instance, a steering system -- only the key components are used to define the steering column's regional percentage: say, the steering column, steering racks and control units. So if those three are at least 75% North American, the rest can be ignored. Some basics stay the same as in NAFTA -- for instance, using either the net cost method or the transaction value method. If an importer is using the transaction value method, however, the company must add 10 percentage points to the regional value goal.
There are many ways importers could be tripped up in compliance, however. For instance, CBP considers a side mirror assembly -- minus the mirror -- as a composite good, according to Dickinson Wright attorney Bruce Thelen. Therefore, even if the total value of the part is 80% Mexican, its Chinese motor is what CBP says gives it the essential character, so the part is taxed at 4.4% -- plus the Section 301 duty of 25%. "The test is not NAFTA marking rules but the general substantial transformation test," Thelen said.
If the Mexican company adds the mirror, the part would have a tariff shift, and the tariffs would be avoided -- but then there's the risk the mirror could break in transit, he said. This problem can crop up elsewhere, he said, giving the example of windshield wiper assemblies that are imported from Mexico without the wiper blades and arms attached.
Another complication is demonstrated by the export of a shock absorber. If the assembly plant wants to include this shock absorber towards its goal of 75% North American goods, the shock absorber must be 75% Mexican. But if the rubber shock absorber damper is worth more than 25% of the part, and the rubber used to make that damper was not from Mexico, it will fail. But there's a way around that, too. If the manufacturer of the shock absorber also makes the damper, rather than buying it, it can consider that non-originating rubber as an intermediate good, and if at least 50% of the value of the part was made in Mexico, that will count as a tariff shift.
Parts companies will also have to consider their customers, as light vehicle assembly plants have to meet a stricter regional value standard than will those for heavy trucks. All these rules are not a major departure from NAFTA, but the labor value content and steel and aluminum purchasing rules are.
Labor value content applies differently to the manufacturers of passenger cars or the producers of light trucks. For cars, starting July 1, 33% of the vehicle must come from workers making at least $16 an hour. For light trucks, it's 45% starting July 1.
The large majority of those wages must come from direct line workers, though Zavaleta noted that wages can come from workers who make engines or transmissions, as long as those local plants produce a certain volume. A parts maker in Mexico can still contribute to an assembly plant in Mexico, even if its own workers don't earn those wages, when the parts maker imports intermediate materials from the U.S. that were made by workers who met the $16/hour standard.
One of the webinar listeners asked if engine testing costs can be used for the wage standard. Zavaleta said no, because that's not considered production.