August 09, 2022
By Birgit Matthiesen, Director of N.A. Manufacturing, ArentFox Schiff LLP
The shift to electric mobility has taken hold, and American drivers are intrigued. So is official Washington.
Through several policies and funding initiatives, Washington hopes to incentivize domestic manufacturing of the electric mobility sector. U.S. trade policy has become increasingly reliant on tariffs, though this often punishes domestic manufacturers that are importing components to be used in domestic manufacturing processes. Electronic parts manufacturers face meeting customers’ specifications at affordable production costs.
With the intermestic juncture of production cost and U.S. trade rules, manufacturing executives may wish to consider three related policy initiatives when shaping their company’s strategic goals and to mitigate exposure to costly risks of non-compliance.
Washington has made clear its support for the e-vehicle. From tax incentives and infrastructure spending to Buy America(n) rule expansion, U.S. policy intends to bolster domestic gains.
“Our manufacturing future, our economic future, our solutions to the climate crisis, they’re all going to be made in America,” President Biden said in March.
Company Chief Financial Officers know the costs involved in any international transaction well. One such cost is transparent and measurable, the import tariff when goods cross the border. These vary depending on the country of origin and whether a preferential tariff agreement covering that import transaction exists. These can be considerable, especially without a covering agreement. Most finished vehicles arriving at U.S. ports of entry are subject to a 2.5 percent tariff. Heavy trucks carry a 25 percent tariff charge. Also, the duty on electronic braking modules is 2.5 percent and up to 6.7 percent for electric motors.
Products from particular countries are especially tariff-heavy. For instance, almost all Chinese imports are targeted with steep special tariffs, or “301 tariffs,” which are imposed in addition to the general duties described above.
Other non-tariff import costs lurk. U.S. legislation passed by Congress, the Uyghur Forced Labor Prevention Act (UFLPA), will implement a rebuttable presumption that imports of products with a nexus to the Xinjiang Uyghur Autonomous Region (XUAR) are produced with forced labor and thus banned from importation. To enforce the law, Customs and Border Protection (CBP) has launched strict enforcement initiatives, resulting in the detention of merchandise. These can be punitive in terms of supply disruptions (or outright denial of entry) and intrusive in compliance and rebuttal costs. There are no de minimis exceptions. Industries, especially at risk for detention, include inputs for the electronics and automotive sectors (e.g., aluminum, minerals, chemicals, and plastics). Also, CBP’s supply chain tracing and diligence requirements are demanding.
Widely referred to as the “new NAFTA,” the United States-Mexico-Canada Agreement (USMCA) is a must review for industry executives, especially during global trade tensions. Negotiators incorporated preferential tariff treatment for “qualifying” vehicles and their supply parts that can significantly affect production costs and sourcing decisions when accurately understood and applied strategically.
“The USMCA is the cornerstone of North America’s economic future and a reflection of the ongoing evolution of trade policy in response to contemporary challenges,” U.S. Trade Representative Katherine Tsai said in February.
USMCA rules that allow an imported automotive part to “qualify” for zero tariffs are admittedly exhaustive and the calculation complex. In contrast to NAFTA, the USMCA regulates automotive parts in new product categories. For instance, “core” parts cover the engine, chassis, suspension systems, and advanced batteries. These demand a 75 percent regional value content.
Also new to the USMCA are the pact’s provisions specific to vehicle manufacturers. For example, Labor Value Content (LVC) requires that at least 40 percent of a passenger car be made by workers earning at least $16 an hour. To demonstrate this calculation, an OEM must include suppliers’ wage data.
In our work with the automotive and other manufacturing sectors, we have learned that the best “first step” for executives is to help them ask the right questions within company divisions. A USMCA diagnostic can be the next step. Key company officials would need to work with experts to:
Build and manage a targeted and unique USMCA strategy project
- Compare the USMCA origin rules to the legacy NAFTA origin rules on a company’s priority products
- Analyze how these products have qualified under NAFTA and how they are now treated under the new USMCA rules
- Critically review the USMCA certifications issued and the USMCA tariff preference claims made by the company
- Shape an “enterprise risk” or “whole of company” approach to the USMCA. This approach includes identifying a team from key corporate divisions within the company – from the sales department to engineers and product managers to the finance group – to provide essential considerations when issuing USMCA certifications and making USMCA claims
- Advise on communications from CBP the company receives so that senior managers properly consider it for response
- Help company personnel understand how the Labor Value Content (LVC) requirements of the USMCA specifically impact the mobility sector
Supply chains are shifting. Products are evolving. There are many uncertainties for those mapping the future for their companies. But one crucial tool is at hand – the competitive advantages proposed by signatories of the USMCA. Adapting these to a company’s vision can be a win/win for the component manufacturer and their vehicle customers.