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Tuesday, 30 June 2020 19:34

How USMCA Will Affect Auto Industry

Written by Ashlie Lopez, Wards Auto

Index

As part of USMCA, the U.S. signed side letters with Canada and Mexico to establish quotas exempt from potential Section 232 tariffs. Additional side letters were also signed to establish a 60-day process negotiation period, if Section 232 tariffs are implemented.

 

Takeaways

 

It is difficult to predict what the exact effect of USMCA will be on the automotive industry. Based on what we know, we can likely expect the following:

 

Higher Costs

 

Manufacturers may incur additional cost and time to meet content, labor and purchasing reporting requirements.

 

To meet wage requirements, the labor value requirement will likely lead manufacturers with deeper roots in USMCA countries to shift production jobs from Mexico to the U.S. and Canada.

 

It is also likely that higher content percentage requirements will raise material costs to manufacturers. Higher material and labor costs will ultimately increase retail prices that may influence consumers in the market for replacement vehicles to consider used vehicles that are less expensive. Financing more expensive vehicles may also become more difficult for less creditworthy consumers.

 

Potential Benefits

 

A potential win for manufacturers complying with USMCA is the quotas exempt from Trump administration tariffs under the 232 side letters.

 

The need to address such issues in side letters indicates an even greater probability that such tariffs will be implemented in the near future.

 

If this happens, manufacturers operating under USMCA may experience a competitive advantage, assuming costs of compliance are lower than the potential 25% tariffs. Consumers may be influenced to move to USMCA brands for which new-vehicle prices will likely not increase as considerably.

 

In light of the coronavirus pandemic that has already caused global plant shutdowns, automakers are evaluating whether the new requirements can be met by the effective date of July 1. 

 

At the same time, the Office of the U.S. Trade Representative has requested petitions from automakers seeking extensions on the new requirements that, if granted, would extend the phase-in period from three to five years. Ultimately, whether automakers seek and are granted such extensions, the race is on to comply with the inevitable changes coming under USMCA.

 

Ashlie Lopez is senior manager in the audit department at accounting firm MBAF.

 

We thank Wards Auto for reprint permission. 


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