USMCA Is Now In Force Mandating Higher Wages, More Paperwork

NAFTA is no more. As of today, the North American Free Trade Agreement that took effect Jan. 1, 1994 has been replaced by the U.S. Mexico Canada Agreement (USMCA) . For automakers and suppliers the new law sparks strict new regulations on the amount of North American content in each vehicle and for workers, especially in Mexico, it means a higher minimum hourly wage. It also means a mountain of paperwork and documentation. 

Specifically, with regard to the automotive industry, the USMCA calls for:

• Regional Value Content: Vehicles must contain 75% North American content. The requirement under NAFTA was 62.5%.
• Labor Value Content: 40%-45% of auto content be made by workers earning at least $16 per hour. 
• At least 70% of a producer’s steel and aluminum purchases must originate in North America.
• Eliminates the “deemed origination” loophole in NAFTA. Under that treaty producers were allowed to ‘deem’ non-North American content as originating, regardless of origin.

In a webchat with the Automotive Press Association in June, General Motors Corp.
GM
Chairman and CEO Mary Barra said her company was working to be in compliance with the new treaty explaining, “There are small shifts we need to make to be compliant. We have, and will, over the timeframe we have to implement. I not aware of any specific issues we have with suppliers. I think everybody’s working to make sure we’re compliant with USMCA in an appropriate fashion.” 

The head of the American Automotive Council (AAPC), the lobbying group for GM, Ford Motor Co.
F
and Fiat Chrysler Automobiles, said his group is a strong supporter of USMCA as it “achieved our goals when negotiations restarted.” 

Speaking during a Center for Automotive Research webinar on June 16, Matt Blunt, AAPC President, pointed out, however, the USMCA does present certain hurdles, especially administrative, for the industry.

On the updated Regional Content Rule he said, “These are content requirements that don’t exist in any free trade agreement anywhere else in the world. It’s going to be challenging to meet these requirements. Our members are going to have to invest millions of dollars to meet the new rule of origin. So we’re hopeful the government will provide us with some flexibility manufacturers need as they do this on the ground and from an administrative standpoint.”

Regarding the new Labor Value Content requirement, Blunt declared, “this is a requirement, given our deep footprints in the United States, our member companies believe they can meet. There are some—the fact that we do so much of our research and development here and have administrative functions here will help, to meet that requirement but it is going to require lots of information from suppliers—not to provide actual wages but certify they pay more than $16 an hour.”

As for the new requirement requiring at least 70% of steel and aluminum purchases originate in North America, Blunt said his members should have no trouble meeting it since most of their supply is already produced in North America, but, “Bottom line is the steel and aluminum requirement is going to be administratively burdensome. It’s going to be burdensome for suppliers to deal with these requests for information for OEMs (automakers).

Indeed the new treaty is destined to alter the relationship between automakers and suppliers as they must work more closely to verify both the origin and percentage of North American content contained in each vehicle, plus meeting hourly wage requirements.

BDO, an international financial services company, works with many automotive suppliers and Jeff Pratt, Supply Chain leader at the firm, predicts supply chain management will take on new importance through USMCA requirements.

“My sense is, it’s really going to help supply chains in North America and it’s going to cause automakers to rebalance their global supply chain,” Pratt said in a telephone interview. 

He predicted the Labor Value Content rule will raise vehicle prices “but on the other hand it should represent some good opportunities for those workers.” 

Pratt noted that the combination of the Covid-19 pandemic, the economic downturn and now, new requirements in the USMCA, have suppliers reporting increased disruptions in their operations. He notes that in last year’s BDO Industry 4.0 Digital Transformation Survey 21% of the respondents said they had experienced some sort of supply chain disruption. This year, Pratt said, that percentage jumped to between 75% and 90%.

Considering all the external conditions, including the need for automakers and suppliers to work more closely together to meet, document and implement USMCA requirements, Pratt noted, “One thing that’s happening is organizations are looking at their supply base and trying to be much more thoughtful, and, I think, more collaborative in those supplier relationships.” 

The America Automotive Council’s Matt Blunt says pulling together all the documentation and making the changes necessary in order to come under compliance with USMCA by today has been a challenge and is grateful there is an additional six month period but hopes the federal government will allow for even more flexibility before imposing penalties or tariffs because it’s possible for some companies “to make a mistake through no fault of their own.”