In light of the impact of high tariffs on EV inputs under Section 301 and Section 232 measures and the uncertainty of future trade actions, qualification under the US-Mexico-Canada (USMCA) Agreement is more important than ever to maintain a competitive advantage in this industry.
The Latest on the USMCA for the EV Supply Chain
- The USMCA, the 2020 free trade agreement between the US, Canada, and Mexico replacing the 1994 North American Free Trade Agreement (NAFTA), is now beyond its first transition year of implementation.
- Goods that qualify under the USMCA's rules of origin are eligible for duty-free treatment, avoiding tariffs of 2.5% for passenger vehicles, 3.4% for lithium-ion batteries, and 25% for trucks.
- Under the USMCA, automotive goods are subject to stricter rules of origin, which affect the EV supply chain by requiring up to 75% North American content for vehicles and parts (including advanced batteries). The USMCA also imposes new high-wage requirements under a Labor Value Content (LVC) requirement, as well as North American steel and aluminum purchasing thresholds on automakers.
- The USMCA's automotive rules were designed to incentivize investment, production, and employment in the North American automotive sector. USTR estimated $34 billion in new capital investments by automakers and battery suppliers over five years as a result of the USMCA.
What to Know?
- Because the battery in a light-duty EV is a core part, the battery must qualify for the EV to be eligible for USMCA benefits. Due to increasing North American content requirements, this can be difficult if the battery's key components are sourced from outside North America. Producers, however, can rely on strategies such as accumulation and the super-core calculation, in addition to relying on the qualification of the other automotive components, to qualify the vehicle.
- The USMCA has new provisions on remanufactured goods and recovered materials that could provide the North American EV battery industry with the ability to qualify remanufactured batteries for duty-free treatment when traded within North America.
- US Customs and Border Protection (CBP) is charged with the enforcement of the USMCA. Importers and producers of EV and EV components should ensure to exercise reasonable care when claiming USMCA to avoid the imposition of unexpected tariffs or penalties in the event of a CBP enforcement action or audit.
- After consultations between the US, Canada, and Mexico on the automotive rules of origin were unsuccessful, Mexico has requested elevating the issue for resolution through a USMCA dispute panel.
- Issuance of the US Final Regulations on the USMCA, covering domestic automotive guidance, such as LVC certification requirements, has been pushed beyond the anticipated publication during 2021.
- Expect the Final Regulations to be issued during 2022, but questions on when and what guidance will be covered loom large. Given the trilateral interpretative concerns on the automotive rules of origin, the question remains will the Final Regulations provide the clarity needed by the automotive industry?