Published in Manufacturing
The lingering process to ratify the U.S.-Mexico-Canada Agreement and pressures from trade disputes and tariffs are weighing heavily on automotive supply chain executives. The lingering process to ratify the U.S.-Mexico-Canada Agreement and pressures from trade disputes and tariffs are weighing heavily on automotive supply chain executives. PHOTO BY: JESSICA YOUNG

Tariff, trade pact uncertainties stressing the auto supply chain

BY Sunday, August 18, 2019 06:30pm

Uncertainties related to trade policies continue to plague the automotive industry, which has closely linked production operations in Canada, Mexico and overseas.

“The industry does well when you have economic and regulatory certainty,” said Ann Wilson, senior vice president of government affairs at the Motor & Equipment Manufacturers Association (MEMA). “The sum total of the changes and stresses on trade are impacting the supply chain.” 

Wilson, who spoke at an annual gathering of automotive executives in Traverse City earlier this month, said suppliers need to stay aware of where they fit in the supply chain to fully understand how trade will impact their own companies. For example, there are important OEM requirements in the new trade agreement between the U.S., Mexico and Canada, but the deal also will affect suppliers specifically, she said. 

“(Suppliers) need to look at their tariff codes and know where they fall within the USMCA,” she said. “You can’t do it on a simple basis. Tariff codes are the only way to know where you fall in the new regional value content (requirements).” 

Requirements under USMCA would increase regional value requirements on metals and labor, as MiBiz previously reported, and there is a concern that the increased domestic sourcing, a measure aimed at promoting U.S. employment, will come with disruptions to existing supply chains. The most significant changes for automakers under the USMCA are related to the automotive rules of origin, or ROO, according to Wilson. 

There is a broad agreement, however, among manufacturing leaders and trade organizations from Michigan that the new trade agreement should be ratified as soon as possible. If ratified by Congress, USMCA would replace NAFTA, which added Mexico to an existing free trade agreement between the U.S. and Canada and went into effect 25 years ago.

“If you assume that Congress passes USMCA soon, we have a January 1, 2020 start date,” Wilson said. “There is a three-year transition time, but there are some possibilities for OEMs to get an additional two years.”

Tariffs imposed due to national security risks, authorized under Section 232 of the Trade Expansion Act, are another ongoing threat to the auto supply industry. 

“The president could impose tariffs if he finds that the import of any commodity or component forms a national security risk,” Wilson said. 

In 2018, the administration concluded a study that found steel, aluminum and certain auto parts — particularly those coming from the EU and Japan — are being imported into the U.S. in such large quantities that they “threaten to impair” national security.

“If we impose tariffs on important parts and autos, it will devastate this industry and devastate our economy,” Wilson said. “We are not a national security risk. Period. That’s all there is to it.”

A quick agreement to “level the playing field” regarding existing and future tariffs could come as early as this month, according to Wilson, and the administration only has until November of this year to enact a “final agreement.” 

As far as Section 301 tariffs actions against China — in effect on billions of dollars in imports — Wilson said those are “here to stay.” 

Trade disputes with China are “a new normal for our two nations,” according to Micheal Dunne, CEO of investment advisory firm ZoZo Go, LLC

“You have two fundamentally different political systems, societies and values that are tugging at one another for the rights to set rules for the future,” he said. “The illusion of China joining something that the U.S. created is melting away. We have to find a new understanding.” 

To date, there are three “tranches” of tariffs on Chinese imports in place, with a fourth tranche — proposed 25 percent tariffs on $300 billion worth of imports — that appear to be on the way. 

“This is not a next month or next quarter trade deal that is going to resolve everything,” Dunne said.

Many goods included in the third tranche —  roughly $200 billion worth of imports — affect automakers, Wilson said, and exclusions must be filed by September 30.

“There’s a lot going on in trade and it’s like dumping a five-pound bag of flour on the kitchen floor,” Wilson said. “We’re never going to get it back to the status quo and you really have to take a long, hard look at where you are in the supply chain, where your customers are and act accordingly.” 

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