August 2020 Volume 2

WASHINGTON UPDATE

value of the assembly. If a part is conforming to its own rule, it is 100% conforming for all other purposes of the rule. If you met your 75% threshold, that allows you to now, put it into something that you can count on 100% of the value toward the content of that next buildup. There is a significant change between NAFTA and the USMCA with regard to the operation of free trade zones in the United States. Under NAFTA, free trade zones had sort of been treated unfairly relative to everybody else operating in Canada and Mexico because of entry rules that were established for goods coming out of a free trade zone. That is effectively changed. Now, free trade zones are on the exact same footing as everybody else, which essentially means that there may be an incentive to use free trade zones, allowing for the importation of goods or inputs from other countries not part of the USMCA and the further use of manufacturing here. Using the roll up calculation, you might be able to have that good become originating for the purposes of tariff treatment. It's an area on which folks haven't really focused, but it is one that we talked to the United States trade representative’s office about and believe is a significant enough change that people will focus on it once it gets some attention. . 9. Is the 2.5% tariff applied to the delta between actual regional value content (RVC) and the RVC threshold? For example: If an automotive assembly has 50% RVC, is 2.5% applied to 25%of the product cost? (75% - 50%= 25%) The duty payment depends on the classification of the good as it enters United States customs territory. If the good qualifies as originating, there’s no basis under the law to adjust the duty rate proportionate to only the amount of the good that is originating. The 2.5% is applied to the delta between the actual RVC and the RVC threshold. This is the case in most free trade agreements. If you had a regional value content provision you had to meet, this is not a significant change from the original NAFTA. 10. Is the 2.5% tariff based on the value of the entire assembly (for example: a vehicle) or the part value only? The tariff applies to the good that's being imported. So if the good is the automobile, the question is: has the automobile qualified for originating treatment, thus eliminating the 2.5 % tariff on the passenger car? If it is a part that is an auto part specifically provided for in the HTS, and it is one that is a regional value content that qualifies for the USMCA preferential treatment, then there is 0% duty. If it's another good, the question is whether it qualifies for USMCA preferential treatment, thus eliminating the MFN tariff. So again, this has everything to do with whether you can qualify for reducing the standard tariff. 11. What year does the tariff go into effect and is it phased in? The USMCA and rules of origin, which is the only real change that we're talking about here, went into effect July 1, 2020.

12. What is the difference between the following, as referenced under Auto Regional Value Content: core parts, principle parts, and complementary parts? There are phased-in elements for the regional value content calculations, and we encourage you to look at chapter four of the USMCA agreement. There are documents out there that sort of describe the year-over-year changes, but for the passenger vehicles and light trucks, the goal is to get the full compliance by year four, which is 75% regional value content. We get a phase-in over that time for parts getting to year four; there's a phase-in for the various component parts. For heavy trucks, we’ve got a longer period for phase-in – full compliance by year eight. With regard to labor value content, we’ve got another type of phase-in for passenger vehicles, which gets you a phase-in up to year four. However, for light trucks and heavy trucks, as well as steel and aluminum articles, we’re at full compliance right now. There's no phase-in element there. But again, this is all available in pretty good detail in chapter four, so we do encourage folks to look at that. In chapter four of the USMCA agreement, there are tables of core parts: the A1 table has it by HTS subheading, and the A2 table basically has a narrative, which we think is quite helpful for those of us who are not naturally in the automobile world. Table B lists the principal parts by HTS subheading, and Table C lists complimentary parts by HTS subheading. It’s going to depend on the specific tariff classification of the good when it is imported into the United States customs territory. These are more broadly encompassing lists of all the content in the vehicle. And then, when we look at principal parts, these are things like tires, motors, bumpers, safety belts, and things like that. Complementary parts are a separate category and has a lower content rule, including locks, catalytic converters, valves, lighting, sound devices, switches, etc. Next is the steel and aluminum rule (effective July 1, 2020), where automaker's only have to certify that 70% of their steel and aluminum purchases come from North American sources. Steel has to be melted and poured in North America. For aluminum, there is no similar melted and poured standard that came in during the ratification process. There is a six year review process for whether they're going to add something like melted and poured on the aluminum side, which occurred largely due to push back fromMexico, where there are very few aluminum smelters. Those were changes that came in at the last minute around labor value, labor rights, and labor overview primarily fromMexico and an agreement to have labor attachés from each country oversee the labor provisions of the agreement. This is partly what made the agreement able to pass. The U.S. Democratic-controlled House was adding some of these more administrative provisions over labor and environmental standards.

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