USMCA rush amid pandemic adds to concern

As the coronavirus continues to wreak havoc on global supply chains, the automotive industry faces another potential upset over a June 1 entry-into-force date for all sections of North America's new trade pact.

The United States-Mexico-Canada Agreement — ratified by the Mexican legislature last June and by Congress in January — replaces the 26-year-old North American Free Trade Agreement. Canadian lawmakers approved the agreement March 13 before leaving for a weekslong break to avoid spreading the coronavirus.

Reports that the Trump administration was considering a June 1 start date have stirred concern among automakers, parts suppliers and trade groups that say the deadline, which they say is premature, could disrupt a smooth transition from NAFTA to the new trade deal, especially as the outbreak worsens.

The groups — the American Automotive Policy Council, Here for America, National Automobile Dealers Association, American International Automobile Dealers Association and Motor & Equipment Manufacturers Association — issued a statement March 13 urging the administration to reconsider, citing unanswered questions on how to interpret the new rules.

"We are in the midst of a global pandemic that is significantly disrupting our supply chains, and the industry is throwing all available resources into managing production through this crisis for our employees and for the broader U.S. economy," the groups said. "Even if it were reasonable to divert our attention to USMCA compliance, the United States, Canada and Mexico have yet to issue, even in draft form, the uniform automotive rules of origin regulation."

A spokesman for the Senate Finance Committee confirmed in an email to Automotive News that the Office of the U.S. Trade Representative verbally told staffers about the June 1 entry into force. An industry source also confirmed calls were made by the trade office. Multiple messages to the office seeking comment were not returned.

In a Monday, March 16, press conference call, Sen. Chuck Grassley, R-Iowa, said the auto industry has a "good argument" and expressed concern regarding the deadline.

"I think the administration would be wise to reconsider and show some flexibility for the sake of our economy because one of the really big winners out of the USMCA is the auto industry," Grassley, chairman of the finance committee, told reporters on the call.

The administration says the USMCA would create 76,000 automotive jobs and result in about $34 billion in new capital investments by auto manufacturers over five years as well as at least $23 billion annually in new U.S. auto parts purchases.

Toyota Motor North America said ratification of the USMCA is "good for the country and the auto industry" and is awaiting final auto regulations on how vehicles can qualify for reduced tariffs under the new deal.

"Once the rules are out, companies will need to comply," Toyota said in an emailed statement. "In the best of times, this would take months. But the coronavirus crisis makes 'now' the worst of times."

Several automakers contacted by Automotive News referred to the groups' joint statement.

The industry has widely supported the new trade deal even though it makes "significant changes to the auto sector," said Cody Lusk, CEO of the American International Automobile Dealers Association.

Lusk said auto manufacturers were caught off guard by the June 1 deadline as they focus on mitigating disruption caused by the coronavirus. At this time, they're still not sure how to comply with the new rules of origin or how the process will work, he said.

"Rushing forward with these new rules without even knowing what the rules of the road are is just absurd and unfathomable to comprehend at this time," Lusk said.

Many of the rules have yet to be fully carved out and require more clarity for manufacturers to comply, industry sources said.

"Who do you check in with on your steel percentage? Who's monitoring and how are they monitoring the labor value content?" said Kristin Dziczek, vice president of industry, labor and economics at the Center for Automotive Research in Ann Arbor, Mich.

"All of that detail? Nobody really knows," she added. "They know what the targets you have to get to are, but they don't know all the details of exactly how we're going to do that."

The coronavirus outbreak could also shuffle any plans made under the deal's alternative staging regime, which gives auto manufacturers at least three years to comply with stricter rules of origin.

"The industry is on board with USMCA. They support it. They can get there," Dziczek said. "But they were expecting a little more lead time and solid rules of how it works before they get started."

Kellie Meiman Hock, managing partner at McLarty Associates, an international trade consultancy in Washington, said the short time frame would be a "record entry into force," especially as the automakers close plants and halt production globally.

"It strikes me as a difficult time to then ask suppliers to adjust quickly," said Meiman, adding that while parts of USMCA are very innovative, the draft uniform regulations are still needed to gauge how companies can comply.

Ann Wilson, senior vice president of government affairs at the Motor & Equipment Manufacturers Association, said the trade group has been advocating for a more sensible timeline with an entry into force on Jan. 1, 2021.

This would avoid any overlap of compliance costs under NAFTA and the new deal, and allow time to comply with the new rules, she explained.

The combination of a USMCA rush amid an ongoing global health and economic crisis has "added an immense amount of stress to this industry," she said.

"We wanted to ensure that there's more manufacturing going on in the U.S.," Wilson said. "And this, indeed, may actually slam the door in the face of that opportunity."

While the industry confronts the coronavirus crisis, there appears to be some relief on one trade front. President Donald Trump formed agreements with the Canadian and Mexican governments to close the borders to nonessential traffic. However, according to Chad Wolf, acting secretary of the Department of Homeland Security, neither border closing applies to "lawful trade or commerce."