Industry stakeholders have stated that the U.S. interpretation of the vehicle content rules under the U.S.-Mexico-Canada agreement may make it difficult for automakers to comply. The result is that they may just switch to low-cost overseas jurisdictions to buy parts and pay tariff fines instead of using regional suppliers.

Lama Khodr of the Canadian Department of Global Affairs stated on November 5 that the trilateral consultations launched in August failed to resolve the dispute in the United States over the interpretation of the rules that stipulated that 75% of cars should be manufactured in these three countries to avoid tariffs.

"Canada will continue to monitor developments closely and is considering next steps."  

The question is how the United States calculates the regional value content (RVC) of core components (including engines, gearboxes, and suspension systems), and how they should be included in the vehicle's RVC once they are loaded into a car or truck.

The automotive industry, Canada, and Mexico interpret the rules as if a smaller part that meets its content requirements is incorporated into a larger part or vehicle, it can be considered as 100% from North America when determining the larger part or vehicle . The RVC of the vehicle.

But as the Canadian Auto News reported in March, the United States interpreted the rule as meaning that only the RVC of a part can count towards the RVC of a larger component or vehicle. For example, according to the United States, if 75% of a part comes from three member states, then only 75% of the parts can be included in the RVC of the larger part.

This interpretation led Mexico’s Deputy Minister of Economy for Foreign Trade, Luz Maria de la Mora, to say in August that if the United States fails to reach an agreement on these rules, the company may seek to transfer its business to countries with more preferential trade agreements. .

"USMCA may become irrelevant to the North American auto industry's trade, because the company may decide not to bother to comply with the USMCA because it has become so expensive, so cumbersome and so difficult," De La Mora told Bloomberg. "It may not be worth their effort to really try to source from North America, so why invest in North America?"

According to the USMCA, non-compliant passenger cars are subject to a 2.5% tariff.

The company would "turn around and say,'What is the penalty? It's 2.5%,"' said Flavio Volpe, chairman of the Auto Parts Manufacturers Association. "'Well, how do I make up for that 2.5% of the money? I think this is a zero-sum game. You either reach 75% or you don't.

"'So, can I source from overseas or lower-cost jurisdictions? Maybe my local content drops to 60% or 50% to make up for this loss."

Kristin Dziczek, vice president of senior research at the Michigan Automotive Research Center, agreed with this assessment.

"A long time ago, one of my first concerns was that if you set the rules too high or too strict, the company would just say,'Well, 2.5% is cheaper than complying with it.'"

Dziczek said that for automakers, deciding to move American car production out of North America will be a daunting task. Conversely, if the automaker decides to source parts from elsewhere, the North American supplier may fail.

"For those suppliers and automakers who think the USMCA's rules are too strict, this will make it more difficult for them to list in North America," she said.

David Adams, chief executive of Canadian global automakers who lobbied for the interests of imported automakers, said that now that negotiations have failed, Mexico can seek arbitration through a panel of experts. A report from the Reuters News Agency on October 26 indicated that the process was ongoing, but Car News Canada could not confirm this.

Brian Kingston, CEO of the Canadian Automobile Manufacturers Association, which represents the Big Three in Detroit, said that it is important to ensure that the USMCA is "correctly implemented."

"The competitiveness of this industry depends on whether we can efficiently move products in all three markets," he said.

Volpe said that many in the industry believe that the US government is "more stringent than they intended for the long term," and added that over time, political and economic developments may change the position of the Biden administration.

Volp said that US component manufacturers may be particularly hurt by the US position. He said these companies supply 50% of the parts to Canadian assembly plants.

"I think the US midterm elections [2022] are the first moment this administration may have to justify an action that would harm the US auto industry," Volpe said.

"Leave aside the interests of Canada and Mexico, if you want to make it more difficult for manufacturers to assemble vehicles that comply with USCMA rules, you are hurting American manufacturers in the other two countries to a large extent."

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