USMCA: Major Impact on Automotive Supply Chain Management

October 11, 2018

The United States-Mexico-Canada Agreement (the “USMCA”), announced on September 30, 2018, updates the North American Free Trade Agreement (“NAFTA”) and makes significant changes in rules impacting automotive supply chains. To qualify for duty-free treatment, vehicles and parts will have to meet new requirements for regional content and labor standards. Additionally, side letters to the agreement provide limited protections from potential automotive tariffs. We highlight those changes below.1


The USMCA largely follows the NAFTA structure, with updates to address digital trade, labor, the environment, transparency, financial services, and currency policy, among other topics. The most notable changes apply to the automotive sector, which will face increased regional content and new labor standards requirements to qualify for zero tariffs. This could send a large ripple through the global supply chain, which manufacturers and suppliers have optimized to comply with current NAFTA content thresholds. The USMCA imposes a high regulatory burden, and some companies may choose to pay the regular global duties on vehicles and parts rather than implement the procedures necessary to comply with the duty-free requirements. 

The current version of the deal does not affect the United States’ Section 232 worldwide steel and aluminum tariffs, which remain intact against Canada and Mexico. However, side letters to the agreement provide for protections against new Section 232 tariffs on vehicles from Canada and Mexico. 

Before any changes can take effect, the USMCA must still be signed by the three countries and approved by Congress, which is unlikely to occur before the mid-term elections. In addition, the USMCA may encounter opposition if the Democrats take control of the U.S. House of Representatives. Assuming the new deal is approved, it is expected to come into force by mid-2019 or 2020. 

Impact on Global Automotive Supply Chains 

A big question for the automotive sector is whether it is more cost effective to meet the new regional content and labor requirements or pay the regular duties on automotive parts and vehicles. The USMCA rules are complex, and the complexity is likely to increase further through implementing legislation and regulations. The highlights are below. 

  • Regional Content – Under NAFTA, vehicles that derive 62.5% of their value from North American component parts may be imported duty free. 
    • The USMCA provides the below thresholds: The USMCA will raise the regional content threshold to 75% for passenger vehicle and light-duty truck imports. This change will be phased-in by 2023. The jump from 62.5% could upend many companies’ supply chain management systems. 
    • Auto parts will be subject to regional value content requirements of between 65% and 75% by 2023. Additionally, the agreement includes localization requirements for items designated as core products, complementary components, and principal parts (which in turn will have their own regional value content requirements). The thresholds for regional value content depend on the type of part and the year of phase-in, leading to complex calculations. 
    • The deal also requires auto producers to certify that at least 70 percent of their steel and aluminum purchases in the previous year were from North American sources. There is no current guidance on how to calculate the value of steel and aluminum content. 

  • Labor Standards – Starting in 2020, the USMCA will require at least 30% of the work done in producing passenger vehicles to have been completed by workers earning at least $16 per hour in North America, with the requirement moving up to 40% for cars by 2023 and 45% for trucks by 2027. 
    • The $16 per hour metric is based on the average production wage, not including benefits, paid to workers directly involved in production. The figure excludes the salaries of personnel in management, research and development (“R&D”), engineering, or other workers not directly involved in production. As a practical matter, Canadian and U.S. manufacturing generally meet those thresholds; thus, this requirement primarily is aimed at low-cost manufacturing centers in Mexico. 
    • Companies will be able to factor in R&D and IT costs to account for up to 10% of the work, meaning that work done by highly-paid professionals may offset lower-wage manufacturing labor to achieve total thresholds. 
    • In order to count assembly operations (as opposed to more complex manufacturing) towards the labor thresholds, the manufacturer must have a facility in North America that assembles higher value components (i.e., engines, transmissions, and advanced batteries), with an average production wage of at least $16 per hour at that plant. 
    • The calculations will be complex and technical for an industry where the supply chain includes labor on parts and subassemblies around the world. The agreement does not provide detailed guidance on how to perform the calculations. 

Products that do not meet the required regional value content requirements will be subject to regular U.S. tariffs. Passenger vehicles and SUVs, for example, will be subject to 2.5% customs duties. 

Manufacturers of vehicles and parts will need to evaluate their global supply chains and model the impact of the changes on their operations using best case and worst case scenarios. While automotive companies are familiar with tracking origin for parts, the imposition of a labor content requirement is new. Completely new systems will need to be put in place to verify and track wage costs. In addition, it can be difficult to quantify the value of research and development and information technology, which under USMCA will count towards the labor thresholds. 

Exchange rates are another variable. They can create big swings in costs, so it will be important to see how exchange rates are factored into the final regulations. 

Ultimately, companies may need to evaluate whether the increased costs and administrative burdens in complying with the heightened USMCA measures are offset by the benefit of importing duty free, or whether the economics support treating their products as subject to general duties from countries with most favored nation (“MFN”) status. 

Assuming the agreement is approved by Congress with the above thresholds, companies will have opportunities to weigh in through the public rulemaking process, as the Administration further defines the standards and implements these new requirements. 

No Immediate Change on Steel/Aluminum 

As a large consumer of steel and aluminum, the automotive sector was watching closely for any changes in this area. The USMCA leaves intact the steel and aluminum tariffs, issued under the national security trade restrictions of Section 232, with respect to Canada and Mexico. Leaders from both countries have said that the United States will need to lift those tariffs if the deal is to proceed. 

Given that the USMCA requires Congressional approval prior to implementation, there may be opportunities for companies affected by these tariffs to pursue political strategies to further their interests. 

Capped Protections for Auto Imports 

The USMCA has bilateral side agreements to provide capped protections to Canadian and Mexican imports, in the event of Section 232 tariffs against auto imports. These agreements allow Canada and Mexico to import up to 2.6 million vehicles each duty free, with authorization to import auto parts up to $34 billion for Canada and $108 billion for Mexico. This cap exceeds the quantities of vehicles and parts currently imported from Canada and Mexico and is expected to do so for another five years. 

The side agreements specify that the United States will not impose any Section 232 tariffs on Mexican or Canadian imports for at least 60 days after the global application of such a measure. The assumption is that this would allow the parties time to negotiate. 

What’s Next 

Under the Trade Promotion Authority (“TPA”) law, the U.S. government may sign the USMCA as soon as November 29. The parties’ formal agreement will start the clock on the two next steps: (1) within 60 days, President Trump must submit a report to Congress on necessary changes to U.S. law, and (2) within 105 days, the U.S. International Trade Commission must complete an economic impact study on the agreement. 

Finally, the USMCA will not go into effect until Congress passes implementing legislation, which may extend into 2020 or later. First, the Executive Branch must submit to Congress both the final text of the USMCA along with a draft Statement of Administrative Action (describing its implementation plans) at least 30 days before it submits a draft implementing bill. Next, Congress will proceed through an expedited 90-day process to act on implementing legislation. 

In the meantime, companies can prepare for these changes now by evaluating the impact on their supply chains, coordinating their political strategy, and preparing for engagement with the Administration during the implementation process. 


1) For a more detailed discussion of the investor-state and trade remedies dispute resolution provisions of the new agreement, please see our Dechert OnPoint: USMCA Scales Back on Investor-State Arbitration but Preserves Trade Dispute Resolution in North America.

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