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The USMCA: What Does It Mean for U.S. Industrials?

PwC put together their insights on the key provisions of the United States-Mexico-Canada Agreement that will most likely impact the industry.

United States-Mexico-Canada Agreement (USMCA), the revised 1994 North American Free Trade Agreement (NAFTA), carries short- and long-term implications for U.S. companies across many sectors, yet its provisions are likely to impact the industrial manufacturing sector most broadly. In its essence, the agreement preserves the tariff-free access for most goods and services that existed under NAFTA.

The door-stopping 1,809-page, 34-chapter pact is a lot to unpack. Despite its breadth and depth, we try here to tease out some of the key provisions that are likely most impactful to the industrials sector—and what companies ought to consider doing now to get ahead of them. We should also note that USMCA requires the approval of the leaders of the three economies as well as legislative ratification, all expected to take place in 2019, given the current degree of bipartisan support for the agreement.

In a Nutshell: USMCA Provisions Impacting Industrials

Boosts regional content One of USMCA’s most sweeping provisions hikes the percentage levels of required regional value content (RVC) of goods on passenger and heavy-duty vehicles and their parts as well as on other industrial products such as chemicals, steel-intensive products, glass, and optical fiber.1  For example, the NAFTA content rule stipulates that 62.5 percent of the net cost of a vehicle must originate in North America; under USMCA, that rises to 75 percent by 2023. The USMCA also looks to benefit the region’s steelmakers for industrial production; automakers will be required to produce passenger vehicles, light trucks, and heavy duty trucks with at least 70 percent of steel or aluminum produced in Mexico, the US or Canada.

Introduces floor on low wages The USMCA also creates a new “labor value content” provision, requiring for tariff-free treatment, that by 2023, 40 percent of the content of a passenger vehicle be built by workers earning an average of $16 per hour (far above today’s average wage in Mexico of about US$5 /hour).2

Sets tariff relief for Mexico, Canada The pact also provides Mexico and Canada with relief in the event that the US imposes punitive (tied to national security) tariffs (i.e., 25 percent) on imports of automobiles and automotive parts under Section 232 of the Trade Expansion Act of 1962. Specifically, the US excludes the following from that Section: 2.6 million passenger vehicles imported annually from Canada, and 2.6 million passenger vehicles imported annually from Mexico; light trucks imported from Canada and Mexico; the first $32 billion of auto parts imported from Canada, and  the first $108 billion of auto parts imported from Mexico. Industrial manufacturing companies outside the USMCA—such as European and Asian auto makers—may well need to reconfigure supply chains to satisfy RVC rules.

The Timeline

Looking ahead, the supply chains, reporting, and tax schemes which have evolved around NAFTA over the last two decades will likely see change–potentially significant–as companies in the region (as well as others, including China and the EU) make necessary shifts in response to USMCA.

There is, however, a given period of time for such shifts in strategies.   Provisions of USMCA–assuming ratification by the three parties in 2019—would take effect in 2020, and, with members being given three years to adhere to the rules, stipulations would not be enforced until 2023. The agreement includes a 16-year “sunset” clause, after which it will expire, but it is also subject to a review every six years (the first of which is slated for 2026), when the three members can opt (or not opt) for another six-year extension.

So, there are a lot of “ifs” surrounding this timeline. If the agreement is ratified by the three national legislatures, companies will essentially have four years until provisions are enforceable. And, in the long term, the USMCA could change if there are requests for revisions (or even a revoking), especially since the life of the agreement will span terms of political leadership.

Looking at USMCA Through a Global Lens 

However, while USMCA agreement is a trade milestone for the year, keep in mind that global trade policy in general is in flux. Other major economies are acting to create the alliances they’ll need for future growth. There are many in motion, including China’s efforts to conclude the Regional Comprehensive Economic Partnership trade pact, centered around Southeast Asia economies, and recent EU talks with Japan, the UK and China (and with the US on the horizon).

These trade moves will also exert an influence on supply chain configurations and strategies to maintain access to the North American markets. So, it’s important that companies avoid looking at the USMCA in isolation as a singular event with singular responses and, rather, build business, corporate and operational strategies that hinge on the larger global trade and supply-chain ecosystem. The USMCA asks many questions which will be answered at some point, such as: How will non-USMCA economies react? Will Chinese companies opt to produce more in Mexico to reach the US market?

What Manufacturers Can Do Now  

Over the next two years, US industries most affected by USMCA—especially manufacturers of industrial and consumer goods—will likely begin an accelerated period of reassessment and a potential recalibration of their supply chains. They will also need to reconsider where they produce and sell and, in some cases, fathom whether business will even be viable under some scenarios. Many companies in the industrial sector, will, then, commence building corporate and operational strategies around USMCA.3

Here are moves to consider to prepare for 2023:

  • Model scenarios around USMCA as well as other trade policies, both existing and prospective (e.g., tax structures, logistics, capacity constraints, etc.)
  • Prioritize actions over a multi-year timeline based on risk-mitigation scenarios (e.g., supply chain changes country of origin shifts, transfer pricing, customer pricing)
  • Build in mechanisms and strategies to ensure long-term supply chain flexibility and agility for long term
  • Assess potential strategic mergers and acquisitions that align with USMCA and other trade policy shifts
  • Form a Program Office to manage the cross-functional impact of USMCA and other trade policy shifts
  • Build more rigorous processes around cataloguing the origin of all imported content and accurately assigning value to that content
  • Look through the customer’s perspective to find answers to your future.  Trade could pressure a business to sell a product at a higher price, or to change to a new product or even to re-invent its business. What would your customer base prefer?

Rajiv Jetli and Sebastian de Meel are principals at the PwC .

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