Manufacturers Say Duty-Free Imports Essential to US Industrial Production

Several witnesses at the Dec. 4 hearing quoted President Donald Trump's boasts about the USMCA, and what a huge improvement it was to NAFTA. The Chamber's Neil Herrington, senior vice president for the Americas, said the five years since entry into force proved Trump right, that USMCA was a triumph.

Herrington called the agreement indispensable, and said many inputs for manufacturing are not available domestically at a good price, or at scale.

He and other witnesses said that USMCA must remain trilateral, rather than being replaced by two bilateral deals.

He did point to some irritants, including a lack of progress on trade facilitation in Mexico and what he called "coercive and abusive practices" of Mexico's tax authority.

Former House Ways and Means Committee Chairman Kevin Brady, R-Texas, who had that role when the pact was delivered, now represents the Coalition for North American Trade, which represents all three countries.

He said Canada and Mexico are America's top investors, customers, "and, most important, suppliers," and that zero tariffs in North America are vital to American prosperity and its industrial base.

National Foreign Trade Council's Brad Wood, a senior trade staffer at the trade group, said USTR should only seek targeted upgrades, not changes to rules of origin. "Do not create the precedent that agreement will be rewritten every five to six years," he said. He also asked that USTR preserve tariff shift rules if they do change ROO, and avoid adding domestic content requirements.

Wood advised the changes should be limited enough that they don't trigger a need for a vote in Congress.

In addition to the request that USMCA-qualifying goods be exempt from 232s, Wood asked that non-compliant goods from Canada and Mexico go back to most-favored nation treatment.

Wood also asked that the USMCA be changed to remove the lesser of two rule for duty deferral, which requires that exporters to Mexico or Canada from bonded facilities in the U.S. can only reduce their tariff exposure by the lower of two amounts -- the duty owed to the U.S. or the duty owed for the receiving country.

The Business Roundtable Vice President Nasim Fussell, argued that every imported manufacturing input from Canada or Mexico supports more domestic manufacturing, and that 15% of the value of those imports is U.S. content.

Similarly, Charles Crain, managing vice president of policy at The National Association of Manufacturers, testified that half of U.S. purchases from Canada and nearly 70% of imports from Mexico are among subsidiaries of a company with U.S. operations, revealing how businesses see the countries' capabilities as complementary.

"USMCA works because the U.S., Mexico and Canada each have different strengths and resources," he said.

Fussell called for enhanced cooperation on economic capacity, such as harmonized defenses against imports made with overcapacity and policy alignment on export controls and investment screening. But she said as the countries work on agreements in critical minerals co-production, they need to consult the private sector so that the rules of origin "reflect economic realities."

Crain said there should be a reduction in compliance costs and efforts to cut red tape at the borders.

The U.S. Council for International Business witness, Alice Clark, senior vice president for trade, argued that the existing rules of origin should continue for chemicals, steel and autos. She said North America has resilient supply chains in agriculture, aerospace and automotive sectors that would be well-served by a 16-year extension.

In a question to Global Business Alliance's director of trade policy, one of the government officials in the hearing asked what the group is seeking in terms of simplified compliance. Danny Meza, whose group represents multinationals based in allied countries with large U.S. operations, said the EU, Japan and Korean deals have different requirements, and that USMCA will have yet different standards. Consulting with businesses could help them simplify their compliance, he said.

The panel also heard from Canadian and Mexican business trade groups, who echoed some of the same themes.

Business Coordinating Council of Mexico's Sergio Gomez Lora, who leads the U.S. office, said Mexico is critical to U.S. government goals of boosting American manufacturing and reducing reliance on imports from non-market economies.

Gomez Lora said that Mexico is the top buyer of U.S. steel and aluminum, and buys lots of U.S. chemicals, plastics, textiles and auto parts.

"Mexican exports also create jobs in the U.S.," he said, since 40% of Mexican exports are intermediate goods.

Gomez Lora said Mexican production makes life in the U.S. more affordable, such as by providing affordable fruits and vegetables in the off-season.

The CCM represents companies that pushed for the auto rules of origin complaint, which Mexico won at the panel, but the U.S. never implemented.

He asked that dispute settlement be strengthened in the review. A government official asked how, and he said in state-to-state disputes, there have been recurring challenges -- either the consultations don't move to a panel, the dispute is stalled, or the rulings are not followed. He said state-to-state disputes should allow exporters whose rights have been breached to seek damages "when governments have not brought [complaints] to closure after a reasonable amount of time."

Like several U.S. business interests, he also argued that the eligibility for Investor State Dispute Settlement needs to be expanded to all sectors, and should not require that companies first exhaust local remedies. (It was limited in USMCA from NAFTA). He said he doesn't underestimate the political sensitivity of ISDS in Washington.

The Future Borders Coalition, a binational organization concerned with the northern border, said USMCA negotiators should push to eliminate wet-ink signature requirements, advance interoperable digital platforms, and improve the Canada Border Services Agency’s Assessment and Revenue Management (CARM).

Executive Director Laura Dawson also said that port fees proposed in a Section 301 investigation on Chinese shipping could raise costs by 150% for shipping on the Great Lakes.

Customs issues also were on the mind of Daniel Neumann, vice president of government relations for the American Composites Manufacturers Association. He said his members appreciated the end of a specific certificate of origin to prove USMCA eligibility, but said that all customs officials have not gotten the memo.

A government official asked if the text needs to be clarified, and asked which country is the worst offender, and Neumann replied that USMCA explicitly says any document can be used, as long as it contains the nine elements CBP needs. He said that while Mexico and Canada do sometimes ask for a certificate, the complaints are most commonly about CBP.

"This is an imminently solvable issue," he said, even before the review takes place next summer.

Neumann said his industry has profited from expanded rules of origin in Chapters 39 and 40, particularly test 1 and test 3. He said if USMCA reverted to NAFTA rules, that would reduce exports.

He gave the example of a Columbus, Ohio, facility that makes sheet molding compound to ship to Mexico, where workers mold it into parts of an automobile.

Although most of the morning's manufacturing witnesses emphasized the benefits of co-production, the panel did hear from some witnesses who would like more scrutiny of Mexican exports.

Tile Council of North America Executive Director Eric Astrachan said he'd like to see a system similar to the textile sector, where U.S. inspectors can visit Mexican facilities to make sure that inputs are coming from where they say they are. He said that should be done at Mexican tile factories owned by Chinese firms.

Anthony Liftgates President Thomas Walker said cheap Chinese steel and aluminum, combined with lower wages in Mexico, makes it impossible to compete with Mexican competitors. He said that Maxon closed all its U.S. production, moving it to Mexico, and has gone from one-third market share to two-thirds as a result.

"We are forced to lower our price or lose sales," he said.

Walker asked the government to add liftgates to the principal parts list for the heavy trucks rules of origin, so that they count toward the steel or aluminum content, and apply labor value content to the product, as well.