On September 30, 2018, Canada, the United States and Mexico announced the conclusion of the Canada-United States-Mexico Agreement (the “CUSMA” or “USMCA” or “NAFTA 2.0”), a modernized free trade agreement that will replace the existing North American Free Trade Agreement (“NAFTA”). On November 30, 2018, the CUSMA was signed by each country. While each of the three countries is moving through their respective domestic ratification procedures and Mexico has ratified NAFTA 2.0, it is unclear when that process will be completed for all three countries.
On May 25, 2019, Canada tabled Bill C-100 "An Act to implement the Agreement between Canada, the United States of America and the United Mexican States" in the House of Commons. On June 20, 2019, Bill C-100 passed second reading and was sent to Committee. The House of Commons has risen for the summer and Canada has an election in October 2019. It is not expected that CUSMA will be implemented into Canadian law this year. However, the House of Commons may be recalled in the U.S. Congress takes all necessary steps to implement USMCA.
Notwithstanding the absence of the actual implementation date, auto producers and their parts suppliers should understand the new rules of origin and how they will impact their operations, their costs and their competitiveness.
The new rules of origin for vehicles and automotive parts are complex, requiring auto producers to conduct several calculations and meet several requirements before their vehicles will be eligible for duty-free treatment when they move within North America (Canada, Mexico and the United States).
Vehicle manufacturers must ensure that the automotive parts sourced for their vehicle production also satisfy new North American content requirements found in the CUSMA. If your currently sourced parts don’t provide enough North American content to ensure that your finished vehicles will qualify for duty-free treatment under the CUSMA, the time to address any shortfall is now.
Both automotive manufacturers and automotive parts suppliers need to be ready to meet and confirm the CUSMA requirements.
As you prepare for CUSMA you may wish to consider the following:
- Have you reviewed your Bill of Materials for each vehicle and/or part to assess whether the parts that you manufacture or purchase for use in vehicle production meet the North American content requirements set forth in the CUSMA? Keep in mind that the amount of North American content required varies based on the part and the type of vehicle into which the part will be incorporated. If you are a vehicle producer, you need to know which parts will qualify as “originating” under the CUSMA rules. Without this information, you may not have what you need to ensure that you meet the minimum North American content requirements for the vehicles that you are producing. If you are an automotive parts manufacturer, your purchasers will want you to confirm/certify the status of your parts – i.e. will they meet the CUSMA requirements as “originating”. If you are selling your parts to purchasers in one of the other CUSMA countries, you will only enjoy the benefits of duty-free treatment under CUSMA if your parts qualify as “originating” when this new agreement comes into force.
- Will you be able to meet the requirement that certain parts used in the production of passenger vehicles and light trucks must be “originating” if you want your finished vehicle to qualify for duty-free treatment (i.e. as “originating”)?
- Does your finished vehicle meet the minimum North American content requirements to qualify for duty free treatment when exported to one of the other CUSMA countries? Passenger vehicles and light trucks will need 66% regional value content (North American content) when the CUSMA enters into force. That requirement will increase to 75% three years later. Heavy trucks, on the other hand, will start at a 60% regional value content requirement, increasing to 70%, seven years after the CUSMA comes into force.
- How much steel and aluminum do you purchase, and does it “originate” in North America? To ensure that vehicles qualify for duty-free treatment under the CUSMA, vehicle producers must ensure that 70% of their steel and aluminum purchases “originate” in North America.
- Have you measured the Labor Value Content for your production? When the CUSMA comes into force, passenger vehicle and truck producers will need to certify that a certain percentage of their production activities are carried out by workers earning at least US $16/hour. The minimum requirements range from 30-45% depending on the type of vehicle produced, the production activity (e.g. assembly, manufacturing, research and development) and the timing of the certification.
The above questions provide an overview of some of the general requirements of the new autos rules of origin. The specific detailed requirements including the calculation methods require a detailed assessment of the vehicle/part, the manufacturing operations and the timing of the calculation. LexSage is able to help you with those calculations.
This is the time for auto manufacturers and auto parts makers to carefully review their sourcing, manufacturing operations and labour content. The new rules of origin are complex but achieving “originating” status for your products will help to manage costs, preserve existing customer demand and generate new sales opportunities.
For more information about Canada's CUSMA rules, please refer to the refer to the LexSage website.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.