USMCA: Devil’s in the Details on Automotive Content

By Frank L. DuBois*

Automated manufacturing of cars

Automated car manufacturing/ Steve Jurvetson/ Flickr/ Creative Commons License

The automotive trade regime in the recently completed U.S.-Mexico-Canada Trade Agreement (USMCA) – “NAFTA 2.0” – will create headaches for many manufacturers but appears unlikely to deliver the big boost in jobs it promises. Much of the focus of the negotiations was on changing the automotive rules of origin (ROOs) to encourage more auto manufacturing in the United States and Canada and make it difficult for automakers to shift production from high-wage locations to low-wage factories in Mexico. Under the new rules, some manufacturers will see significant changes in operational strategies while others will be less impacted.

According to the agreement, a 2.5 percent tariff will be applied to the import value of cars (25 percent for light trucks) if the vehicles don’t meet the new ROOs:

  • 70 percent Regional Value Content (RVC) rather than 62.5 percent under the old rules.
  • 40 percent of the Labor Value Content (LVC) of vehicles (45 percent in the case of light trucks) must be made in plants that employ workers making at least $16 per hour.
  • 70 percent of the value of steel and aluminum used in the vehicle must be of regional origin.

The Kogod Made in America Auto Index (KMIAA), which I’ve been compiling for seven years, challenges assumptions used when calculating the U.S. content of a car, including some used as marketing strategies to portray products as being more “American” than what a buyer might think.

  • KMIAA results and rankings differ significantly from those indices that evaluate domestic content solely based on where a car is assembled, without taking into account the country of ownership of the brand. (Japanese, Korean and German car manufacturers are treated the same as U.S. manufacturers despite non-US R&D and profits that are repatriated back to the home country). Location of manufacture of engines and transmissions, which account for approximately 21 percent of vehicle value, may also not be addressed in other indices. Likewise, assembly labor accounts for around 6 percent of vehicle value.
  • The index reveals the complicated nature of content calculations. Toyota assembles only one vehicle at its plant in Tijuana – the Tacoma light truck with an engine of either U.S. or Japanese origin (depending on displacement) and a transmission of either U.S. or Thailand origin. Toyota has made the same truck in San Antonio, Texas, but recently announced that all of Tacoma production will be moving to the Mexican factory. Toyota is likely to reduce its non-North American sourcing (fewer engines and transmissions from Asia), and restructure supply chains to place a premium on U.S. parts and power train sourcing. Other manufacturers face greater shifts. The Audi Q5, for example, currently has 79 percent Mexican parts content and only 3 percent U.S. parts.

Producers’ operational responses are likely to run the gamut from full compliance to limited changes. Some automakers may simply pay the WTO tariff of 2.5 percent for access to the U.S. market. A separate requirement that at least 40 percent of the value of cars be made in plants with $16 per hour labor will be problematic given that wages in Mexican auto plants average $3 to $4 per hour. Producers will have to decide whether to raise wages in Mexican plants, shift sourcing to U.S. and Canadian plants, or attempt to develop ways to game the system by shifting some high-wage expenses into the labor value category. While the new rules may boost some manufacturing jobs in the U.S. and Canada, they will raise costs leading to lower auto sales, and have nowhere near the impact that their boosters have promised. Again, the devil is in the details.

March 5, 2020

* Frank L. DuBois is an Associate Professor of Information Technology and Analytics at American University’s Kogod School of Business. Data for the KMIAA comes from data automakers provide under the American Automotive Labeling Act (AALA) and from field visits to car lots in the DC metropolitan area.

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