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Bumper to Bumper: Will the CUSMA Rules of Origin Make America’s Auto Industry Great Again?

Jon Johnson
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Jon Johnson: C.D. Howe Institute

C.D. Howe Institute Commentary, 2019, issue 547

Abstract: In the negotiations for a new NAFTA, the Trump administration targeted the North American auto industry for major change. The Trump administration objected to the NAFTA rules of origin – with which a good must conform to be eligible for NAFTA duty-free treatment – as permitting too much non-NAFTA content in North American automobiles, and was fixated on the US’s significant balance-of-trade deficit with Mexico, most of which is accounted for by trade in automotive goods. For Canada’s auto industry, there is much at stake. In 2017, Canada exported automotive goods to the United States valued at close to $62 billion, and the US market is overwhelmingly the destination for vehicles produced in Canada. Therefore, it is important that the rules of origin with which the Canadian automotive industry must work be transparent and administratively workable. Under the new deal, the Canada-United States-Mexico- Agreement (CUSMA), the rules of origin that will apply to motor vehicles and their parts are considerably more stringent than their NAFTA counterparts. This Commentary analyzes the CUSMA rules of origin for automotive goods, identifies ambiguities and areas of uncertainty, and makes suggestions for clarifications through the adoption of the Uniform Regulations – for which CUSMA fortunately provides – that will provide greater certainty to both businesses and administrators in how to apply the rules. Adapting to the CUSMA rules will require major adjustments in supply chains. This is particularly the case with the substantially higher Regional Value Content (RVC) thresholds required for most automotive goods. While some relief is possible through limited alternative staging alternatives, the staging to the higher RVC thresholds under CUSMA is only three years for passenger vehicles and light trucks, as compared with eight years under NAFTA. Further, the CUSMA rules of origin are needlessly complex. There are multiple categories of parts for different categories of vehicles with varying RVC requirements that depend on the end use of the part. Complexity increases compliance costs, which are burdensome for all producers, but particularly for smaller producers that are less able to afford investment in expensive compliance systems. While the CUSMA rules mostly eliminate NAFTA tracing requirements, the CUSMA text inexplicably retains a form of tracing for several narrow categories of vehicles. The CUSMA rules of origin regime contains two requirements that are unprecedented in such regimes; namely a steel and aluminum purchase requirement and a labour value content requirement. These are performance requirements that are consistent with a managed trade regime (where rules are designed to achieve certain economic outcomes) and not with a free trade regime (which seeks to remove barriers to trade so that economic results are dictated by market forces). Two reports cast doubt on the benefits of the deal for the US. A US International Trade Commission report found, overall, the new rules should lead to a modest increase in employment in the US automotive sector, but the costs of vehicles produced in the United States will increase and production of vehicles there will decline. An International Monetary Fund working paper states quite bluntly that the tighter auto rules of origin will not achieve their desired outcomes by reason of higher costs, increased consumer prices and reduced demand.

Keywords: Trade and International Policy; Manufacturing; North American Integration (search for similar items in EconPapers)
JEL-codes: F13 F15 L62 (search for similar items in EconPapers)
Date: 2019
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