By: Jennifer Horvath, Partner, Braumiller Law Group
The USMCA recently went into effect on July 1, 2020, which ended the twenty-six years reign of NAFTA. A major focus of the new agreement was to update the regulations relating to the automotive sector. While a majority of the agreement is similar to NAFTA, it is critical for all parties engaged in the automotive supply chain to understand the key differences, and how these changes may affect current operations.
One major change with the USMCA is the certification requirements. For most vehicles, three certificates will be required in order to claim preferential duty free treatment: (1) a general USMCA certification, (2) a high wage labor certification (better known as the labor value content (LVC) requirement), and (3) a steel and aluminum certification. Each of these certifications will be discussed in greater detail below.
The USMCA does not require a specific certificate form, as was previously required under NAFTA. However, there are still certain data elements that must be attested to, and a specific certification statement must be made. These data elements and certification can be included on any document such as a commercial invoice. However, for ease of recordkeeping, tracking, and operationally speaking, many importers are finding it most effective to utilize a form containing the required information. Often, a format based on the previous NAFTA certificate form is being used although this is not required. Although the USMCA certification requirement is more informal, it is key to note that the certification must still be in place prior to making the USMCA claim. In addition to the change in a specific form, it is important to note that a USMCA certificate can now be executed by the importer rather than only the exporter and/or producer.
The LVC requirement is also an important consideration for companies within the automotive sector. Under NAFTA, there was no wage requirement for the manufacturing of automobiles when claiming preferential treatment. Now, the USMCA requires 30% of work performed on the manufacturing of automobiles in the U.S. to be performed by workers who earn an average of $16 per hour in order to qualify for duty-free treatment. This overall LVC is set to increase every year until 2023 when it will be capped at 40%. There are many nuances to the LVC requirements that should be critically reviewed by companies if they intend to take advantage of the benefits afforded by the USMCA. For example, the LVC requirement only applies to passenger vehicles, light trucks, and heavy trucks, and can include different amounts in the wage calculation such as: (1) an amount for high-wage materials used in production, (2) an amount for high-wage labor costs incurred in the assembly of the vehicle, and (3) an amount for high-wage transportation or related costs for shipping materials to the location of the vehicle producer (if not included in the amount for high-wage materials), among other things.
The final certification requirement detailed in the USMCA relates to steel and aluminum. Under the USMCA, a passenger vehicle, light truck, or heavy truck will be considered originating only if at least 70% of the vehicle producer´s purchases of steel and aluminum are originating. This requirement applies to the vehicle producer´s purchases throughout North America, at the corporate level. A business should carefully review its global supply chain to confirm that additional steel and/or aluminum content does not need to be sourced from a USMCA territory in order to claim duty-free treatment.
Along with updated certification requirements, companies should be aware of changes to regional value content (RVC) requirements and tariff shift rules for motor vehicles and motor parts. For instance, these are a few of the updated RVC requirements:
- RVC for passenger vehicles and light trucks will increase to 66%, 69%, 72%, 75% (over a four- year period);
- RVC for heavy trucks will increase from 60% to 70% (beginning seven years after the date of entry into force, and thereafter).
- For passenger vehicles and light trucks (net cost method):
- RVC for super core parts will increase to 66%, 69%, 72%, 75% (over a four- year period);
- RVC for core parts will increase to 66%, 69%, 72%, 75% (over a four -year period);
- RVC for complimentary parts will increase to 62%, 63%, 64%, 65% (over a four- year period);
- RVC for principal parts will increase to 62.5%, 65%, 67.5%, 70% (over a four- year period).
Along with changes to RVC requirements, companies should review any differences with tariff shift rules. For example, under NAFTA, in order to satisfy a tariff shift for subheadings 8703.21 – 8703.90, there must have been “a change to subheading 8703.21 through 8703.90 from any other heading, provided there is a regional value content of not less than 50 percent under the net cost method.” However, under the USMCA, the new rule for the same section states, “a change to a passenger vehicle of subheading 8703.21 through 8703.90 from any other heading, provided there is a regional value content of not less than 75 percent under the net cost method; or a change to any other good of subheading 8703.21 through 8703.90 from any other heading, provided there is a regional value content of not less than 62.5 percent under the net cost method.” While this is only one example, it highlights the significance of understanding the updated product-specific rules of origin under USMCA.
It is critical for businesses to review the detailed changes within the USMCA and determine if any internal changes should occur. These changes could range from sourcing additional products domestically in order to meet RVC requirements, to raising wages for workers who manufacture automobiles in the U.S. to meet LVC requirements. Accordingly, businesses that previously took advantage of duty- free treatment under NAFTA should review and confirm that its products still qualify for preferential treatment under the USMCA.
For any additional inquiries, or if you would like to further discuss changes within the automotive sector as they relate to the USMCA, please contact Jennifer Horvath at Jennifer@braumillerlaw.com.