A new study examining the United-States-Mexico-Canada Agreement (USMCA) states the rules of origin under the agreement, regarding automobiles and their parts, are too stringent when compared to the same provisions in the North American Free Trade Agreement (NAFTA).
The American government objected to the NAFTA rules of origin, which it felt allowed too much non-NAFTA content in North American automobiles. What triggered this was the United States’ stance that there is an unfair deficit in trade with Mexico, which largely consisted of traded automobile goods. On the other side of the border, the U.S. is Canada’s top market for cars totalling almost $62 billion in 2017, so it is “a matter of considerable importance that the rules of origin with which the Canadian automotive industry must work once (USMCA)(USMCA) comes into effect be transparent and administratively workable.”
“Adapting to the (USMCA) rules will require major adjustments in supply chains,” read the report. “This is particularly the case with the substantially higher Regional Value Content (RVC) thresholds required for most automotive goods. While some relief is possible through limited alternative staging alternatives, the staging to the higher RVC thresholds under (USMCA) is only three years for passenger vehicles and light trucks, as compared with eight years under NAFTA.
The report further states that the USMCA rules of origin are “needlessly complex” with multiple categories of parts for different categories of vehicles with varying RVC requirements that depend on the end use of the part.
The USMCA rules of origin contain two requirements that are unprecedented in such agreements, according to the study, namely a steel and aluminum purchase requirement and a labour value content requirement.
“These are performance requirements that are consistent with a managed trade regime (where rules are designed to achieve certain economic outcomes) and not with a free trade regime (which seeks to remove barriers to trade so that economic results are dictated by market forces),” read the report.
It’s clear that these measures were put in place with the goal of increasing auto production in the U.S., but the U.S. International Trade Commission issued a report which states that the new rules will lead to a modest increase in employment in the U.S. automotive sector. The report also states that the cost of producing a vehicle in the U.S. will increase while production will decline.
Another report by the International Monetary Fund echoed the trade commission’s findings by stating that the “tighter auto rules of origin will not achieve their desired outcomes by reason of higher costs, increased consumer prices, and reduced demand.”