With just five weeks before the U.S.-Mexico-Canada Agreement introduces tougher automotive rules of origin, auto makers are weighing whether to ask for more time to comply.
The Office of the U.S. Trade Representative has requested petitions from auto makers that are seeking an alternative staging period for the rules of origin, which require more vehicle content to be made in the region and a significant portion of that content to be made with high-wage labor. If eligible, auto makers will have an additional two years to meet regional value and labor value content thresholds, extending the phase-in from the standard three years to five.
But the time-consuming process must be completed while purchasing departments are scrambling to ensure assembly plants can get parts after extended shutdowns to slow the spread of COVID-19. Vital decisions must be made, but the uniform regulations—the instruction manual providing details on how to comply with the new rules—aren't out yet.
Those regulations are expected to be released June 1—a month before the U.S.- Mexico-Canada Agreement enters into force, several trade attorneys and experts told Automotive News.
"While the outline of what companies need to do is certainly contained in the agreement, the devil is often in the details," said Kellie Meiman Hock, managing partner at McLarty Associates, an international trade consultancy in Washington, D.C.
Meiman compared the uniform regulations to the blueprints of a house: "Where do the wires go? Where do the pipes go?" she said. "Uniform regs delve into the detail of how you are actually going to operationalize what was agreed to."
The uniform regulations will provide the gritty details such as precise regional value and labor value content calculations and formulas, and what kind of electronic records must be kept to show compliance, said Vanessa Sciarra, vice president of legal affairs and trade and investment policy at the National Foreign Trade Council.
The regulations also need to validate the U.S. Customs and Border Protection's interim implementation instructions, a guidance document posted in April that provides an early look at new requirements under USMCA, according to Ann Wilson of the Motor and Equipment Manufacturers Association.
Wilson, senior vice president of government affairs, said the strength of the supply chain relies on the U.S., Canada and Mexico adopting similar expectations and requirements.
"That's what's going to be important about these uniform regulations: Do they adopt everything that's in the instructions verbatim? Do they go into greater detail? And are they adopted by all three countries?" she said.
"Those are still unknowns to the industry."
Meanwhile, draft plans for alternative staging must be submitted to the trade office by July 1 and require auto makers to provide business-confidential information and detailed outlines showing how they will meet the requirements during the extended period.
Final plans correcting any deficiencies must be submitted by Aug. 31. Auto makers also have to provide similar petitions to Canada and Mexico.
"That is one of the more challenging steps that has to be completed because there's a great deal of information that one would need to acquire from their suppliers prior to submitting plans," Matt Blunt, president of the American Automotive Policy Council, told Automotive News.
The council, which represents the Detroit 3, is working closely with its members and the trade office to gather the required information, Blunt said.
General Motors has not submitted an alternative staging plan and did not comment last week on whether that could change, according to spokeswoman Jeannine Ginivan.
Ford Motor Co. did not comment on whether it is submitting a petition. Fiat Chrysler Automobiles declined to comment.
Still, several industry sources told Automotive News they expected a majority of auto makers to submit plans because it gives them more time to comply with a major revision of the auto rules of origin.
"We are aware that some auto makers are considering the submission of request for alternative staging," said Jennifer Safavian of Here For America, a group representing several foreign auto makers.
Safavian, the group's first CEO, said the additional time potentially allows for a smoother transition for the auto makers and their suppliers.
Kia Motors America plans on joining other automakers in submitting alternative staging plans, spokesman James Bell said in an email. Toyota Motor North America is also expected to submit plans, according to a person familiar with the matter.
If the vehicle models covered by an alternative staging period make up more than 10 percent of an auto maker's total vehicle production in North America, then the auto maker must include additional details on investments and sourcing changes that will allow those vehicles to comply with USMCA's rules of origin once the extended period expires.
"It's a Herculean task," Lou Longo, a partner and international consulting practice leader at Plante Moran, said of the process.
Vehicles that don't meet the trade deal's rules-of-origin requirements are subject to certain tariffs.
In the U.S., the duty rate is 2.5 percent on passenger vehicles and 25 percent on light trucks. Longo said a likely strategy is for auto makers to determine which vehicle models are easier to bring into compliance and which ones will absorb the duty rate.
While the auto makers have had some time to digest these big decisions, many of their suppliers could be playing compliance catch-up in coming weeks, Longo said: "This is going to potentially hit them right between the eyes."