Trade attorney and Steel Market Update contributor Lewis Leibowitz offers the following update on events in Washington:
The USMCA will take effect on July 1 of this year, despite calls to push out its implementation due to the economic crisis from the coronavirus. USMCA repeals and replaces the North American Free Trade Agreement, which took effect in 1994. USMCA continues duty-free trade between Canada, Mexico and the United States. It is similar to NAFTA in many ways. Among the more significant changes are the inclusion of e-commerce and digital trade, which did not really exist in 1994, and the automotive rules of origin, requiring a higher “regional value content” for vehicles to get duty-free entry into the three countries. The old requirement was 62.5 percent of value, and the new standard is 75 percent. The products that count toward the regional value content changed, and the new standard will be phased in over four years. In addition, labor value will be counted toward regional value content. By the fifth year of the agreement, 40 percent of the labor value of passenger cars and 45 percent of trucks must use labor earning at least $16 per hour.
For steel and aluminum businesses, the automotive rules have added significance. A new rule requires that at least 70 percent of steel and aluminum content must originate in North America, and that to be “North American” it must be “melted and poured” in North America. This will affect trade patterns to the advantage of North American steel producers of semifinished products, and away from rerollers.
A key mission of USMCA was to steer manufacturing back to the United States. Whether it accomplishes that will be watched carefully. Some argue that car companies may elect to drop out of NAFTA and pay the 2.5 percent duty on cars imported from Canada and Mexico. It may be less costly for some companies to do that than to make the changes needed to comply with the new USMCA rules. Others argue the other way.
The USMCA was a key goal for the Trump administration, and achieving it, with the backing of Democrats in Congress and organized labor, was a major achievement.
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