"Possible USMCA Revision... Auto Industry Must Prepare for Stronger Rules of Origin"

Trilateral Trade Agreement Among the United States, Mexico, and Canada
Possibility of Strengthened Rules of Origin Reflecting U.S. Positions

There has been a recommendation that the automobile and auto parts industries should proactively prepare for the possible revision of the United States-Mexico-Canada Agreement (USMCA).

On the 25th, the Korea Automotive Technology Institute analyzed four future scenarios in its report titled "USMCA Joint Review and Trends in the Automotive and Auto Parts Sectors": extension of the agreement, withdrawal, delay of the review, and revision. However, the report assessed that the likelihood of the United States simply extending USMCA as is, or completely withdrawing from it, is not high.

The report stated, "Given that U.S. President Donald Trump remarked that 'the agreement is meaningless for the United States,' the possibility of an extension is low," adding, "If the United States were to withdraw, conflict between Congress and the administration would be inevitable."

Accordingly, it projected that the relatively more likely outcome is a revision of the agreement in the direction of strengthening rules of origin in line with U.S. demands. This projection is based on the analysis that the United States, as the largest export market for finished vehicles and parts from Canada and Mexico, will hold a superior bargaining position.

It also viewed the possibility as high that the "joint review" procedure required for extending the agreement will be delayed due to differences in position among the three countries. The report noted, "If rules of origin are tightened in the way the United States wants, the burden on each company will differ depending on its U.S. local production volume and its procurement ratio of parts from the United States and Canada," and added, "If the joint review is delayed, the USMCA will remain in force, but uncertainty will increase due to annual re-examinations."

For the domestic automobile industry, the importance of scenario assessments in preparation for changes in rules of origin, as well as the establishment and management of a supply chain database (DB), is expected to grow.

In particular, regarding the "Roll-Up" provision, most raw material companies are calling for its abolition, and there have been disputes arising from differences in interpretation among the three countries, which raises the possibility that it will be scrapped. The Roll-Up provision is a rule under which, if a core component meets the rule-of-origin requirement, the value of non-regional materials contained in that component is treated as originating within the region.

The report also pointed out the need to calculate labor value content in preparation for an increase in the minimum wage, and to assess the impact on vehicle models that have a high share of low-wage assembly and parts.

The automobile industry prefers to maintain the current USMCA, citing the burden of having to alter already established supply chains. By contrast, the raw material industry is taking a more aggressive stance than other sectors in favor of tightening rules of origin, including abolishing the Roll-Up provision under which materials are recognized as originating within the region, strengthening calculation methods, expanding the scope of labor value content application, and reflecting the inflation rate.

The report stated, "When rules-of-origin standards are tightened, companies must be able to respond to demands for information on proof of origin, production processes, and ownership structures, as well as substitutability and timing of transitions," and added, "The importance of establishing and managing a supply chain database will increase even further."