Inside Logistics

New trade agreement unclear on auto rules of origin

C.D. Howe Institute report finds USMCA rules are more stringent than those in NAFTA, and needlessly complex

July 3, 2019

TORONTO – The new Canada-United States-Mexico Agreement (CUSMA) sets out rules of origin for auto products that need greater clarity to provide certainty for the businesses who must apply them, says a new report from the C.D. Howe Institute.

In “Bumper to Bumper: Will the CUSMA Rules of Origin Make America’s Auto Industry Great Again?” Jon R. Johnson, a former advisor to the Canadian government during the NAFTA negotiations, takes a deep dive into the arcane rules of origin that will determine whether a good is eligible for duty-free treatment and finds they are still unclear in many cases, more stringent than those in NAFTA, and needlessly complex.

In the negotiations for a new NAFTA, notes Johnson, the Trump administration targeted the North American auto industry for major change. The Trump administration objected to the NAFTA rules of origin as permitting too much non-NAFTA content in North American automobiles, and was fixated on the US’s significant balance-of-trade deficit with Mexico, most of which is accounted for by trade in automotive goods.

For Canada’s auto industry, there is much at stake. In 2017, Canada exported automotive goods to the United States valued at close to $62 billion, and the US market is overwhelmingly the destination for vehicles produced in Canada. “It is important that the rules of origin with which the Canadian automotive industry must work be transparent and administratively workable,” says Johnson.

The author analyzes the CUSMA rules of origin for automotive goods, identifies ambiguities and areas of uncertainty, and makes suggestions for clarifications through the adoption of Uniform Regulations – for which CUSMA fortunately provides – that will create greater certainty.

“Adapting to the CUSMA rules will require major adjustments in supply chains,” says Johnson. “This is particularly the case with the substantially higher Regional Value Content (RVC) thresholds required for most automotive goods.”

Further, the CUSMA rules of origin are needlessly complex. There are multiple categories of parts for different categories of vehicles with varying RVC requirements that depend on the end use of the part. “Complexity increases compliance costs, which are burdensome for all producers, but particularly for smaller producers that are less able to have difficulty affording investment in expensive compliance systems,” says Johnson.

The CUSMA rules of origin regime contains two requirements that are unprecedented in such regimes; namely a steel and aluminum purchase requirement and a labour-value content requirement. These are performance requirements that are consistent with a managed trade regime (where rules are designed to achieve certain economic outcomes) and not with a free trade regime (which seeks to remove barriers to trade so that economic results are dictated by market forces).

Two reports cast doubt on the benefits of the deal for the US. A US International Trade Commission report found, overall, the new rules should lead to a modest increase in employment in the US automotive sector, but the costs of vehicles produced in the United States will increase and production of vehicles there will decline. An International Monetary Fund working paper states quite bluntly that the tighter auto rules of origin will not achieve their desired outcomes by reason of higher costs, increased consumer prices and reduced demand.

The author advises North American automotive producers to actively involve themselves in the Uniform Regulations process, by carefully reviewing the CUSMA rules of origin and urging their respective governments to negotiate and implement Uniform Regulations that clarify ambiguities, establish procedures that reduce compliance costs and facilitate routine application of the rules.