U.S., Canadian execs lobby for USMCA relief

Auto executives on both sides of the U.S.-Canadian border are lobbying President Joe Biden's administration to alter his predecessor's stringent interpretation of North American trade provisions.

Since the United States-Mexico-Canada Agreement went into effect July 1, the U.S. has interpreted provisions on how regional content should be calculated differently from what was originally agreed upon by the three signatory countries, said David Adams, president of Global Automakers of Canada.

The U.S. interpretation makes "meeting the ... content provisions that much more difficult for everyone to achieve," Adams wrote in an email.

Industry groups have raised concerns in recent months about the U.S. approach to calculating regional value content for passenger vehicles and light trucks under USMCA.

By 2023, 75 percent of a vehicle and "core" parts — including engines, transmissions and suspension systems — must be manufactured within the three member countries to be shipped without tariffs. That's up from 62.5 percent under the former North American Free Trade Agreement. "Principal" parts, which include tires, bumpers, brakes and airbags, will face a 70 percent regional content requirement by 2023.

In question is the "roll-up provision," a source familiar with the details of this issue said. The industry, Canada and Mexico are interpreting the provision differently than the U.S. is.

According to the industry's understanding, if "a part is conforming to its [regional content] rule, and you put it in another assembly, it is now 100 percent conforming for all other purposes of the rule," the source said. "So I have Part X. It has to meet a 70 percent content rule, and it does. [If] I put Part X into component Y ... I can count all of Part X toward the content for Part Y instead of 70 percent of Part X."

U.S. "Customs is now saying, 'No, if it's 70 percent, and you put it in something, it's 70 percent, and that's all you can count' " toward the larger component or vehicle's regional value content, the source said.

Said Adams: "This interpretation was entirely unexpected, and if it sticks, it will take many manufacturers time to make adjustments and potentially rejigger supply chains to avoid the tariff. Either way, there are inefficiencies, which [equal] costs."

Matt Blunt, president of the American Automotive Policy Council, said it was "extremely important" that the three countries "work it out as quickly as possible." Blunt's group represents General Motors, Ford Motor Co. and Stellantis.

"We think it's important for Canada and Mexico and the United States to resolve this and any issue related to the USMCA quickly, but certainly one as significant as this one," he said.

"It should really be treated as a diplomatic priority, in our view, to ensure that the USMCA is properly implemented."

Adams said he hoped Katherine Tai, Biden's nominee for U.S. trade representative, would view the issue as a "top priority" upon her confirmation to the position.

The source familiar with the USMCA content issue expected it to be "quietly resolved" by the three nations, though the politics of the situation could be tricky for Biden and Tai.

"It would be very hard for Biden to say, 'No, we side with the industry and Canada and Mexico, and we want to let you roll up' because that would mean less content [sourced from] North America," the source said.

Another source familiar with discussions among the three countries said Canada and Mexico were waiting for Tai to be confirmed before raising the issue with the U.S.

The U.S. interpretation has not "gone over too well with the other two countries," the source said. "And that's why I think they're really hoping that the new administration, that they could talk to them about this and hope they can all get back on the same page."

Tai, who spent the last four years as chief trade counsel to the U.S. House Ways and Means Committee, would bring a wealth of experience to the job. She was a key figure in negotiations with the Trump administration and House Speaker Nancy Pelosi during North American trade talks.

Tai appeared likely to pursue a more cautious approach to trade than her Trump-era predecessor, Robert Lighthizer. But it remained unclear whether she would veer far from the protectionist view of North American trade rules and other issues. "She's going to be as tough as her predecessor," said Flavio Volpe, president of the Automotive Parts Manufacturers' Association.

The Senate Finance Committee approved Tai's nomination March 3, sending it to the full Senate for a vote. At press time, the Senate had not confirmed Tai as trade representative. At least 50 senators would need to vote in favor of her confirmation, with Vice President Kamala Harris serving as a potential tiebreaking vote. Democrats and Republicans each control 50 Senate seats.

Bloomberg contributed to this report.