Automotive News Canada - July 2020 - v2 - 16

* JULY 2020

USMCA is here, ready or not
The replacement for
NAFTA presents new
rules and little time to
adapt, complicated by
the economic turmoil
created by the pandemic
By JOHN IRWIN
TORONTO BUREAU

AUTOMAKERS AND SUPPLIERS
face a "heavy lift" in adapting to new
North American trade rules during a
health crisis that has roiled the global
economy.
"It's literally unprecedented to
learn and comply with such a complex
and new set of rules and origin in less
than 30 days, let alone during a pandemic," said Karin Muller, director of
customs compliance and trade governance at Magna International Inc.
The United States-Mexico-Canada
Agreement (USMCA), which replaced
the North American Free Trade
Agreement (NAFTA), went into effect
July 1 after years of negotiations.
Broad outlines of the agreement have
long been known, but the industry
received the pact's uniform regulations only on June 3.
The auto industry had lobbied all
three countries to extend the starting date to Jan. 1, 2021, to allow more
time to understand the rules and make
adjustments to ensure compliance, but
to no avail.
"Usually, we'd have a year and
a half until implementation, but we

just got the uniform regs," said Flavio
Volpe, president of the Automotive
Parts Manufacturers' Association
(APMA).
"Companies will be playing a bit of
catch-up for a few months, but it's not
going to trip up anybody."

BIG DEAL IF YOU'RE SMALL
Kristin Dziczek, vice-president of
industry, labour and economics at
the Center for Automotive Research
in Ann Arbor, Mich., said that while
automakers
and larger suppliers might
have a good
grasp of the
rules, smaller companies
with fewer
resources
could struggle
for certification and compliance as they
Kristin Dziczek
adjust.
of the Center
"There's
for Automotive
a lot of small
Research said
companies
smaller companies
with fewer resources that are just
going to learn
could have trouble
when the rubwith certification
ber meets
and compliance as
the road here
they adjust to the
new rules under the exactly what
the certificaUSMCA. F I L E P H O T O
tions are going
to look like. Some of the provisions are
brand new and haven't been done in
any other trade agreement. It can't be
cribbed," she said.
"There's no boilerplate for how to

Trade deal's rewards won't
be realized overnight
By JOHN IRWIN
TORONTO BUREAU

IT WILL TAKE UP TO FIVE YEARS
for the Canadian supply sector
to fully reap the benefits of the
new North American trade pact
as the deal is phased in and automakers work through product
cycles, according to the head of the
Canadian parts makers.
"As the program matures and
every midcycle refresh comes, you'll
have an eye toward localization,"
said Flavio Volpe, president of the
Automotive Parts Manufacturers'
Association. "You'll see it more at
full transition in three years, and
with a mix of alternative staging
programs, it might be more like
three to five years."
The United States-MexicoCanada Agreement (USMCA) took
effect July 1, replacing the North
American Free Trade Agreement
(NAFTA). The USMCA requires
automakers to source more content on a vehicle within the region
and requires at least 40 per cent
of a vehicle's value to be made by
those making at least US $16 (about
$22) an hour. Those changes are
designed to promote manufacturing,

particularly in the United States.
Volpe and many in the Canadian
supply sector have been bullish
about what the
new rules could
mean for domestic suppliers over
the long run. He
has said that once
fully implemented, the trade pact
could result in as
much as $8 billion in new annuFlavio Volpe of al business for
the Automotive Canadian suppliParts
ers.
Manufacturers'
The USMCA's
Association
labour and conthinks the new tent provisions,
rules under
however, will not
the USMCA
be fully phased
trade pact
in until 2023.
could mean
more business And it might be
even longer until
for Canadian
many automaksuppliers in
ers have to meet
the long run.
those requirePHOTO: JOE
WILSSENS
ments, as many
were expected to
submit plans to enter an alternative staging period that, if approved,
would give them an additional two
years. - ANC

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Usually, we'd have
a year and a half until
implementation, but we
just got the uniform regs.
FLAVIO VOLPE

President, APMA

do this. They're going to have to start
all over from scratch over the course
of just a few weeks. Nobody's ever
complied with a labour-value rule or a
steel-aluminum rule before."
Indeed, the USMCA introduces new
rules on labour and when fully implemented, 70 per cent of steel and aluminum in a vehicle must originate from
the region for it to be exempt from tariffs, which was not a NAFTA requirement.
The steel and aluminum requirements come as the Trump administration threatens to impose new tariffs on
Canadian aluminum, casting a shadow over the efforts of companies to
navigate the new trade environment.

plants earning that much.
The uniform regulations brought
clarity to how companies can calculate labour content. Magna's Muller,
who spoke during a June APMA webinar, said the hourly rate applies only
to wages and cannot include benefits,
overtime pay or profit sharing. The
rules also clarified which workers
count toward the labour requirement.
"They've come a long way in defining what 'direct production workers'
are," said Rob Wildeboer, chairman of
supplier Martinrea International Inc.
"It's much more realistic than the
original interpretation of it, where
someone had to be on the line and
touch the part. That's not how parts are
made."

PAPERWORK PUZZLE

In the short term, one challenge for
companies might be figuring out how
new paperwork should be filled out.
Under the USMCA, companies need
to fill out new documents that differ
from NAFTA documents, which will
no longer be accepted. Indeed, speakers at the APMA webinar repeatedly stressed that because the USMCA
is a new trade deal, there's also new
PAY A NEW PAIN POINT
paperwork.
"The only point of conBy 2023, at least 40 per
fusion" for suppliers, Volpe
cent of a vehicle's value
said, "is, 'Can I use my
must be made with labour
NAFTA materials?'"
making at least US $16
In the early days of the
(about $22) an hour. That
pandemic, countries were
rises to 45 per cent for
expected to take different
pickup or cargo vehicles.
approaches to enforcement.
There was no labour proviJoy Nott, a partner in trade
sion in NAFTA.
and customs at KPMG in
The rules will be phased
Canada, said the federal
in, beginning at 30 per cent
government has tried to be
of a vehicle's content this
Although the United flexible with companies in
year, 33 per cent in 2021
States has said it
all matters of enforcement,
and 36 per cent in 2022.
will offer "maximum while Mexico has signaled
Likewise, the requireflexibility" as
that it will be more strinment that 75 per cent of
companies adapt
gent in enforcement from
a vehicle's value must be
to the new trade
the get-go.
sourced regionally does
agreement, it
The United States has
not come into play until
does not mean
said that over the next six
2023. It stands at 66 per
months, it will offer "maxicent this year and rises by that "they aren't
mum flexibility" with comthree per cent a year until going to enforce
whatsoever," said
panies as they adapt to the
then.
KPMG's Joy Nott.
new rules.
On paper, the labour
PHOTO: KPMG
"Maximum flexibility
rules apply to automakdoes not mean that they aren't going
ers and not suppliers. But if a vehicle
to enforce whatsoever," Nott said. "It
is assembled at a factory that does not
just means that they recognize there
pay its workers at least US $16 an hour,
are challenges, and they're willing to
automakers are likely to approach supwork with companies to give people
pliers to figure out how to ensure that
a little bit of time to let people get the
at least 40 per cent of the parts in the
data that they need." - ANC
vehicle are made by workers at supplier

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Automotive News Canada - July 2020 - v2

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