The new USMCA treaty will force companies to elevate the regional content in their production to 75 percent from the 62.5 percent previously outlined by NAFTA. This will be a challenge that OEMs and suppliers will have to approach differently depending on the current state of their production operations.
Under the new conditions established by USMCA, vehicles eligible for nontariff exports will have to comply with a regional content of 75 percent in their production. Given that the current level is 62.5 percent under NAFTA guidelines, companies will have a grace period of three years to meet the new goal.
According to Eduardo Solís, Executive President of AMIA, the new rules of origin will start to be modified when USMCA is enforced, which he expects will be by mid-2019 or the beginning of 2020. From that moment onward, rules of origin will gradually increment until reaching the 75-percent mark. As soon as the treaty is implemented, regional content will increase to 66 percent. The rule will advance to 69 percent in 2021, to 72 percent in 2022 and finally to 75 percent in 2023.
The agreement does contemplate the situation of OEMs such as Kia, BMW and Audi that only recently arrived to the country with a goal to comply with a 62.5 percent regional content outlined by NAFTA. These companies will have an extra two years to reach the 75-percent standard, which means their deadline will be until 2025, thus operating under a different schedule to raise their own local production content. “For the automotive industry it was a pivotal issue to have a transition period in the trilateral agreement of three years plus two,” said Solís at a press conference with INEGI. “Three years for most companies and two extra for those players that in certain models still have problems reaching the established percentages.”
USMCA, however, will also operate under a different rule of origin than what companies were used to. Now, investors will have to comply with four key points to export their products without cost. First, the overall regional content value (RCV) will be 75 percent as previously stated. Second, the rule includes a labor content value (LCV) of 40 or 45 percent, depending on the type of vehicle (light or pickup, respectively). This means that 40 or 45 percent of the components in the vehicle will have to be manufactured in regions with salaries of at least US$16 per hour. Wages in Mexico, however, will not be modified to comply with this rule. “The agreement does not establish any scheme in terms of salaries,” said Solís. “It only says parts and components that come from countries that pay US$16 per hour.”
Though this might seem discouraging for Mexican production, Solís also explained that the LCV could be lowered by 10 percent if companies have engineering and development operations in the region. Moreover, if the company manufactures at least 100,000 engines, 100,000 transmissions or 25,000 batteries in the region, it can receive an extra deduction in the LCV of 5 percent.
The third point companies must consider is that 70 percent of the steel and aluminum used in their production must come from North America. This is especially challenging considering the price differences in steel in the US, which are 50 percent higher than in Europe according to Thomas Donohue, CEO and President of the US Chamber of Commerce. Finally, companies must consider that essential components including chassis and body parts, transmissions, axles, suspension parts, steering systems and batteries must also comply with an RCV of 75 percent.
In light of all these requirements, it is natural for companies to consider discarding USMCA altogether and choose to operate under WTO standards that allow light vehicle exports with a fixed tariff of 2.5 percent under the Most Favored Nation clause. Unfortunately, USMCA negotiations have made this a tad more complicated for companies.
Given the US’ current investigation under Section 232 regarding threats to national security of light vehicle imports, OEMs could face tariffs of up to 25 percent should they wish to market their vehicles in the US. An annex letter to USMCA establishes a limit of 2.6 million light vehicle exports from Mexico that would be exempt from the tax should it be enforced. However, that only applies to vehicles following USMCA’s rules of origin. A new clause on the agreement establishes a separate limit for exports under WTO regulations of 1.6 million light vehicles, provided they comply with the rules of origin established on the original NAFTA. Regarding auto parts, the limit would be exports worth US$108 billion, again under the condition these also comply with NAFTA rules of origin.
“The challenges are clear,” said Solís. “We will have a stricter rule of origin but we achieved a delicate and complex equilibrium that means a great challenge for us.”
The data used in this article was sourced from El Economista and El Universal.