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.

New Western Hemisphere Trade Pacts Push Back Against Big Pharma

By Thomas Andrew O’Keefe*

Money_and_pills_in_three_colors

Attempts to limit competition from generics by pharmaceutical giants were called “TRIPS-plus” provisions in USMCA drafts/ Ragesoss/ Wikimedia Commons

Two major trade agreements affecting the Western Hemisphere have recently struck blows against the pharmaceutical industry’s efforts to keep drug prices high by limiting competition from generic medications. Big Pharma tried, but failed, to include provisions in the United States-Mexico-Canada Agreement (USMCA) and the EU-MERCOSUR Association Agreement that would go beyond those expressly permitted by the World Trade Organization’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).

  • Those provisions would have made it extremely difficult for generic manufacturers to enter the market and contain costs. Unaffordable medicines are a large and growing global problem. Many people die of diseases today not because there is no cure, but because they cannot afford the medications.

In the version of USMCA approved by the U.S. Congress and to be signed by U.S. President Trump this week, the Democratic majority in the House of Representatives removed “TRIPS-plus” provisions that would have given “data exclusivity” for new uses of existing pharmaceutical products for up to three years and for so-called “biologics” for ten years. (Biologic drugs are produced from a living organism or contain components of a living organism, including a wide variety of products derived from humans, animals, or microorganisms by using biotechnology.)

  • Data exclusivity would have prevented generic manufacturers from utilizing the original trial results and other test data filed with regulatory health agencies concurrently with the patent application, demonstrating the medication’s safety, quality, and efficacy. Also removed from the USMCA was a provision that would have restricted competition from generic pharmaceutical manufacturers by delaying patent expirations to compensate for “unreasonable” bureaucratic delays in approving the patent. Furthermore, the USMCA now expressly allows generic manufacturers, as per Article 30 of the TRIPS Agreement, to utilize compounds used to make a patented drug in order to develop a generic version in anticipation of that drug’s patent expiration.

Similarly, the IPR chapter in last year’s EU-MERCOSUR agreement does not include TRIPS-plus provisions thanks, in part, to resistance from South American governments concerned about bankrupting their national health care systems because of increasing costs for new medications. The IPR chapter specifically supports World Health Assembly Resolutions on pandemic influenza preparedness and on a global strategy and plan of action on public health, innovation and intellectual property – both of which recognize that “intellectual property rights do not and should not prevent Member States from taking measures to protect public health.”

  • The IPR chapter is consistent with the Doha Declaration on the TRIPS Agreement and Public Health of November 2001. Furthermore, all the signatory states are required to implement articles of the TRIPS Agreement providing the legal basis for WTO members to grant compulsory licenses exclusively for the production and export of affordable generic medicines to other members that cannot domestically produce the needed medicines in sufficient quantities. (The only obligation is for the signatory states to make “best efforts” to adhere to the Patent Cooperation Treaty.)
  • The MERCOSUR countries resisted intense lobbying pressure from European pharmaceutical companies to accept provisions on data exclusivity and to compensate for bureaucratic delays by extending the monopoly on a patented medication beyond the 20-year maximum permitted by TRIPS. The fact that the United Kingdom, home to global pharmaceutical giants such as GlaxoSmithKline and AstraZeneca, was distracted by Brexit undoubtedly contributed to this outcome.

The successful pushback against attempts by the major pharmaceutical multinationals to extend their state-sanctioned monopolies to guarantee a steady flow of profits reflects public outrage over multiple scandals that have ensnared the industry in recent years. This includes not only the massive opioid addiction crisis in the U.S., but firms buying up patents that are about to expire and jacking up their prices in excess of 1000 percent. It makes the traditional industry argument of needing extended monopolies to incentivize innovation and the development of new drugs ring hollow as these speculators incur no research and development costs. As a result of the efforts of MERCOSUR and Democrats in the U.S. House of Representatives, the pharmaceutical industry may be facing a paradigm shift in which it will be forced to develop a new business model for pricing new treatments.

January 28, 2020

Thomas Andrew O’Keefe is the president of Mercosur Consulting Group, Ltd. and a lecturer at Stanford University. He is the author of Bush II, Obama and the Decline of U.S. Hegemony in the Western Hemisphere (Routledge, 2018).