Nearly three years after formal negotiations first began, the Canada-United States-Mexico Agreement (CUSMA) will come into force on July 1, 2020. CUSMA replaces the existing North American Free Trade Agreement (NAFTA) and imposes new requirements on North American businesses seeking to take advantage of continent-wide tariff exemptions.
In 2019, the manufacturing side of the Canadian automotive industry produced 1.92-million vehicles representing C$103.1-billion in factory shipments for eight per cent of manufacturing gross domestic product (GDP). Over 134,000 people are directly employed by automotive manufacturers in Canada. A staggering 75 per cent of the sector’s annual output is exported, underlining the critical importance of automotive cross-border trade to the Canadian economy.
This bulletin answers frequently asked questions about the impact of CUSMA on the trade of automotive vehicles and parts within North America and provides a brief overview of key updates that will assist automotive manufacturers in effectively navigating the shift from NAFTA to CUSMA. Further information can be found on the Government of Canada's website.
1. What is the most important change created by CUSMA concerning the trade of automotive goods?
In order to ensure automotive goods are considered “originating” under CUSMA and therefore afforded beneficial tax treatment, automotive manufacturers will need to comply with increased North American content requirements for automotive vehicles and parts, in addition to newly introduced content requirements relating to steel and aluminum and “high wage” labour expenditures.
2. What are the new regional value content requirements for vehicles?
The rules of origin for automotive goods provide that a certain percentage of a vehicle must be produced using materials sourced from within North America. Passenger vehicles and light trucks are currently subject to a 62.5 per cent content requirement under NAFTA. Heavy trucks are required to meet a slightly lower threshold of 60 per cent. Under CUSMA, these content requirements will increase significantly, gradually shifting to 75 per cent for passenger vehicles and light trucks and 70 per cent for heavy trucks.
3. How about the regional value content requirements for automotive parts?
Automotive parts are likewise subject to increased North American content requirements. Under CUSMA, automotive parts will be grouped into three classes: core parts, principal parts and complementary parts. Applicable content requirements will range from 65 per cent to 75 per cent based on the classification of the automotive part and the type of vehicle for which it has been produced.
4. Are there specific requirements for steel and aluminum?
Yes. For a vehicle to be considered “originating” under CUSMA, at least 70 per cent of the vehicle producer’s purchases of steel and aluminum must be sourced from within North America, subject to certain flexibility in time periods covered. This is a new requirement that does not currently exist under NAFTA.
5. What is the new labour value content requirement?
While specific labour value content requirements vary based on the type of vehicle being manufactured, a range of 40 per cent to 45 per cent of a vehicle’s value must be produced using labour performed by employees earning at least US$16 an hour. “High wage” technology and assembly labour will satisfy a fraction of the required labour value content. However, a minimum percentage of the value must be derived from “high wage” material and manufacturing labour. These labour-related requirements are a new addition under CUSMA.
6. When do the new requirements come into force and are any phased in over time?
The regional value content requirement for passenger vehicles, light trucks and their auto parts will be phased in over a period of three years, whereas the requirement for heavy trucks and their auto parts will be phased in over a period of seven years. Labour value content requirements for passenger vehicles will be phased in over a period of three years, whereas there is no phasing-in of similar requirements for light trucks and heavy trucks. Steel and aluminum content requirements will be in effect as of July 1, 2020, the date on which CUSMA comes into force.
7. Can the length of the prescribed transition period be extended?
Vehicle producers may submit a petition requesting an alternative to the standard staging regime. If accepted, an alternative staging regime may provide vehicle producers with additional time to transition to the new rules and allow for different regional and labour value content thresholds within that transition period.
Draft alternative staging plans must be submitted to the Office of the United States Trade Representative by July 1, 2020. Further guidance with respect to eligibility requirements and procedure can be found here.
8. What are section 232 tariffs? Will Canadian auto manufacturers be subject to these tariffs going forward?
Pursuant to section 232 of the Trade Expansion Act of 1962, the United States government may impose special tariffs on imports on national security grounds. While there has been some sabre rattling between the United States and Canada related to these tariffs, there are currently no such tariffs in place.
After considerable negotiation, Canada and the United States have agreed that Canadian exporters will be exempt from paying any tariffs imposed under section 232 on all light trucks and up to 2.6 million passenger cars, and US$32.4-billion worth of auto parts annually.
For further information, please reach out to a member of the Blakes Automotive group or your usual Blakes contact at any time.
Please visit our Navigating CUSMA: Key Changes for Businesses hub to learn more about how CUSMA may impact your business.
Blakes and Blakes Business Class communications are intended for informational purposes only and do not constitute legal advice or an opinion on any issue. We would be pleased to provide additional details or advice about specific situations if desired.
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