Automotive News Canada - July 2021 - 28

28
* JULY 2021
Tariffs on used vehicles?
The U.S. government
thinks the USMCA's
content rules apply to
the importation of
NAFTA-era vehicles
By JOHN IRWIN
and AUDREY LAFOREST
AUTOMOTIVE NEWS CANADA
INDUSTRY TRADE GROUPS IN THE
United States and Canada are imploring
the Biden administration to back
away from a Trump-era interpretation
of United States-Mexico-Canada
Agreement (USMCA) that they say
could make most used vehicles shipped
to the United States subject to tariffs.
" The previous U.S. administration
took a more restrictive interpretation
of the new USMCA rules [by] saying the
new rules of origin on vehicles moving
forward should also be applied retroactively
on used vehicles from a few years
ago - which, quite frankly, is completely
nonsensical, " said Tim Reuss, CEO
of the Canadian Automobile Dealers
Association (CADA).
At issue are used vehicles produced
before the USMCA went into effect.
As of July 2020, the trade pact raised
regional-value content requirements
and introduced labour-value content
rules that must be met for a vehicle to
cross borders without being subject to
import duties.
Industry groups say the U.S. government
has interpreted the new trade
rules to mean that vehicles made before
July 2020 are still subject to USMCA
requirements, not those under the previous
North American Free Trade
Agreement (NAFTA). As a result, U.S.
dealers who purchase used vehicles
from Canada or Mexico are in some
cases being slapped with tariffs or at
least warned that they could be subject
to them in the future.
The U.S. government's interpretation
applies to vehicles imported from
Mexico, but it likely causes the most
headaches for dealers at the border.
According to Cox Automotive Canada,
about 300,000 used vehicles are typically
shipped from Canada to the
United States annually as U.S. dealers
look to take advantage of a favourable
exchange rate.
TRUCK TARIFFS
" It's not a good situation for our dealer
members that have relied on exporting
some of these vehicles to the U.S.
and for quite a few U.S. dealers that
have relied on that volume, " Reuss said.
It's an issue of particular importance
this year as dealers on both sides
of the border contend with a shortage
of new and used
vehicles due to the
microchip shortage.
While supply is low,
demand for vehicles
is high in the
United States, particularly
for crossovers,
SUVs and
pickups.
Under the
USMCA, light-duty
passenger vehicles
that do not meet the
agreement's trade
rules are subject to
a 2.5-per-cent duty.
But that figure rises
to 25 per cent for
trucks including
pickups - which
are popular and
often highly profitable
for dealers in
both countries.
Reuss: A more
restrictive
interpretation
of trade rules
that could
slap tariffs
on vehicles
shipped
through border
crossings is
" completely
nonsensical. "
FILE PHOTO
" If dealers are trying to get used
trucks or cargo vehicles out of Canada,
this is potentially quite impactful, " said
Kristin Dziczek, senior vice-president of
research at the Center for Automotive
Research (CAR) in Ann Arbor, Mich.
'IMPOSSIBLE' STANDARDS
Trade groups in the United States
are lobbying federal trade and customs
officials there to change how USMCA
rules are applied to used vehicles. They
argue that cars and trucks manufactured
while NAFTA was in place should
be subject to NAFTA-era rules.
In a June 26, 2020, letter to Robert
Perez, deputy commissioner of U.S.
Customs and Border Protection, U.S.
industry groups argued that their
government's interpretation could
" effectively lead to tariffs being
assessed on all used-car trade. "
The letter is signed by the presidents
and CEOs of seven groups
that represent manufacturers and
dealers, including the National
Automobile Dealers Association
(NADA) and the American Automotive
Policy Council. A letter making similar
points was sent to U.S. Trade
Representative Katherine Tai on March
24, 2021.
All used vehicles could be subject to
tariffs " because, as a practical matter, it
is impossible at this point to determine
whether a vehicle built pre-USMCA
meets the new requirements of the
USMCA, " the letter reads.
The groups say that is because
" there are no records or documentation "
for older vehicles that could " feasibly
establish that they comply " with
new rules-of-origin requirements. The
methods for determining whether a
vehicle meets regional-content value
levels is different under the USMCA
than it was under NAFTA.
The USMCA also includes requirements
pertaining to labour as well
as steel and aluminum content that
NAFTA did not have.
" Thus, U.S. importers will be unable
to show that vehicles built in the
NAFTA region before the USMCA are
eligible for duty-free treatment, " the
letter reads. " Such an outcome would
have a devastating impact on used-vehicle
commerce among the United States,
Mexico and Canada. And this adverse
outcome could be exacerbated further if
Canada and/or Mexico were to retaliate
by rendering used-vehicle imports from
the U.S. ineligible for preferential tariff
treatment. "
REGRESSIVE IMPACT
The industry groups said tariffs
would have a regressive impact on U.S.
consumers and would lead to a decrease
in the number of used vehicles imported,
thus raising prices.
" Since many of these used vehicles
are purchased by lower-income customers,
the imposition of tariffs would have
an especially undue impact on them, "
A letter from trade groups to U.S.
Trade Representative Katherine
Tai warned that " as a practical
matter, it is impossible at this point
to determine whether a vehicle
built pre-USMCA meets the new
requirements of the USMCA. "
PHOTO: ISTOCK
the letter reads.
The U.S. trade representative did not
respond to multiple requests for comment.
The
Canadian government, meanwhile,
" has raised the issue with officials
in the United States and Mexico,
and these discussions are ongoing, " a
spokeswoman for Global Affairs Canada
said in an email. " We have had significant
engagement with stakeholders
on this issue, including the Canadian
Automotive (sic) Dealers Association. "
RULE CHANGES?
Even if the Biden administration
changes the government's interpretation
of the rules, confusion surrounding
2019 and 2020 model-year vehicles could
persist, said CAR's Dziczek.
" Any vehicle manufactured after
July 1, 2020, is going to have to meet
USMCA [requirements], " she said. " So
it won't be as easy as [saying] this is a
2019 or 2020 model. ... It's going to have
to come down to what is the date manufactured
for those vehicles that were
made in 2020. "
Should the Biden administration
keep the same interpretation of rules
indefinitely, the problem could largely
resolve itself within a few years, Reuss
said. Used vehicles imported to the U.S.
from Canada are typically two to four
years old, he said. Eventually, most of
those will have been assembled after
July 2020, undoubtedly making them
subject to USMCA rules. - ANC
USMCA's first year: Frictions emerge over parts of the deal
BY THE NUMBERS
CONTINUED FROM PAGE 23
" If we did not have a trade agreement in place, if
the USMCA negotiations were not successful, and
we were suddenly facing tariffs into that market, it
becomes far more challenging to make the case to be
exporting from Canada, " he said. " Absolutely, dutyfree
access into the U.S. is key to ongoing automotive
investments right here. "
In the context of the country's electrification mandate,
Flavio Volpe, president of the Automotive Parts
Manufacturers' Association (APMA), said Canada has
a chance to be the " battery capital of North America "
if it can figure out the metals processing piece of the
equation and the role of government funding.
" I think we can land one or two of these massive
giga-battery plants in Ontario or Quebec and then
make those examples be the best selling point for us
around the world, " Volpe said. " We only have a couple
years to get this done. There is a real chance -
it's a coin flip - that we miss that opportunity. "
Opportunity aside, areas of friction over parts of
the trade deal have become apparent during its first
year. The Trillium Network's Sweeney said questions
remain over how the US$16-an-hour minimum-wage
requirement is meant to be calculated.
" Are they only counting the individual people who
make that much money, or are they averaging it out
Canada's 2019 vehicle manufacturing
and parts trade
* Exports to Mexico: $1.6 billion
* Exports to the United States: $78.8 billion
* Imports from Mexico: $13.4 billion
* Imports from the United States: $60.5 billion
* Automotive manufacturing trade surplus with
the United States: $18.3 billion
* Deficit with Mexico: $11.6 billion
Source: Statistics Canada
over the plant or over the company? " he said. " Who
are they including? Because by this measure, no one
in Mexico gets included. No one. "
Similarly, David Adams, president of Global
Automakers of Canada (GAC), has concerns about the
complexity of reporting requirements for automakers.
" For
the manufacturers, it means a lot more compliance
just because the agreement is more complex,
and it's a completely new sort of reporting process, he
said. " I think there's certainly a lot more administration
associated with the new agreement. "
Adams also highlighted an ongoing dispute
between Canada and the United States over interpretation
of the content rules. The disagreement must
be resolved before anybody can determine the deal's
impact on the Canadian sector, he said.
" All vehicle manufacturers are looking to find the
best suppliers at the highest quality with the lowest
possible costs, " Adams said. " To the extent that you
have to rejig that to meet North American content
requirements to secure the preferential tariffs, then
yeah, that does add cost. "
Overall, the USMCA " is not a cost-reducing trade
agreement, " Adams said. " If anything, it's probably
going to add cost to vehicles as a result. "
It will likely take about five years of trade data to
get an accurate reading of the USMCA, Kingston said.
" We already had duty-free access, so it [USMCA]
was effectively reconfirming our duty-free access to
the United States, " he said. " You may not see, even
when you look over data for a number of years, a
big bump that you could relate to the deal because,
of course, we already had that access. It just protected
it. " - ANC
Automotive News Canada - July 2021

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