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."