As we progress into 2023, we have a number of interesting reports on a variety of topics. So, let’s get started. At the end of this Update, we will give you a glimpse of webinars that the Mid-America Chapter will be having this spring.
USMCA Disputes
The five-member automotive disputes panel, set up last January, made its preliminary decision in November, but the final report was not released until January 11, a day after the Three Amigos concluded their meetings in Mexico City. The firm of Thompson Hine released a detailed report on the dispute, “Panel Concludes Automakers May Continue Core Parts ‘Roll-up’ to Meet USMCA’s RVC Passenger Vehicle and Light Truck Requirements.” The panel “concluded that automakers may continue to use the longstanding practice of “roll-up” when calculating the percentage of North American originating materials used in production of core automotive parts (e.g., engines) that is subsequently factored into the computation for determining the total amount of originating content (the ‘regional value content’ or ‘RVC’) for passenger vehicles and light trucks.”
The panel rejected the US position that “roll-up” did not apply to core parts in the calculation. The US position would have made it harder for plants in Mexico and Canada to meet the new duty-free threshold of 75 percent regional content, up from 62.5 percent under NAFTA. The three countries have 45 days from January 14 to accept and comply with the decision with a number of options. If a resolution is not found, USMCA authorizes Mexico and Canada to take remedial measures against the United States by suspending USMCA benefits of “equivalent effect” for the US automotive sector and potentially other sectors of the US economy. Although “the clock is ticking” on this one, the US may soon be issuing new guidance on automotive Rules of Origin that may indicate the route it will take.
In January 2022, a USMCA dispute settlement panel found Canada’s dairy TRQ allocation measures to be inconsistent with Canada’s USMCA obligations. However, the US has found that Canada’s new policies are still inconsistent with its obligations under the USMCA and it has requested new talks, “United States Requests New USMCA Dispute Consultations on Canadian Dairy Tariff-Rate Quota Policies.” If the countries are not able to resolve the matter through consultations, the US may request the establishment of a panel under the USMCA. (See a copy of the Consultation Request with all the details.)
An issue that has yet to be resolved involves Mexico’s decree on December 31, 2021, that calls for a phase-out of use of both glyphosate and genetically modified (GE) corn for human consumption in the country by January 31, 2024. A report was issued by USDA’s Foreign Agricultural Service at the time of the Decree, “Mexico Publishes Decree to Ban Glyphosate and GE Corn.” Although the majority of US corn exports to Mexico go into the livestock feed industry, US corn is imported for use in the processing sector to make cereals, starches, and other processed products. There is no GE corn cultivated in Mexico. Mexico proposed some modifications to the Decree at the end of 2022, but both USDA and USTR, in meeting with government officials on January 23, indicated that the changes were not sufficient and “if this issue is not resolved, we will consider all options, including taking formal steps to enforce our rights under the U.S.-Mexico-Canada Agreement” (“Statement by USDA, USTR Officials Regarding Meetings in Mexico Today”).
Texas Border
The Texas Border Coalition has released a very interesting report, “Texas Borders, History, Policy and Management.” The Coalition is a group of nonpartisan elected officials and business leaders who make policy recommendations to help the Texas-Mexico border region grow and prosper economically. The white paper brings into focus the development of the border region historically and then the growing need for immigration regulations. Initially the concern was for the collection of tariffs rather than the exclusion of people as, prior to the 1880s, no federal limitations on immigration were written into law. The paper goes through the numerous laws initiated to control the flow of immigrants and discusses their successes and failures over time and the actions that the President and Congress can take to ensure that border communities are safe and thriving.
Productivity Growth in Mexico
The World Bank has issued a report, “Productivity Growth in Mexico: Understanding Main Dynamics and Key Drivers,” They conducted a comprehensive firm-level analysis of the entire Mexican economy over 25 years and surveyed more than 20 million businesses. They found that “Mexico’s disappointing aggregate productivity masks large differences in productivity levels and growth across locations, sectors, and firms” and that a “geographic productivity divide runs between the North-Center and South of Mexico, but large differences also persist between municipalities within regions.” The report goes on to show that “Mexico’s aggregate productivity is weakened by structural factors at industry and firm level — access to finance, lack of incentives to invest in technology, managerial capacities, and the business environment — that impede productive firms’ access to resources.” The productivity issues have been compounded by COVID-19.
There are several very detailed chapters:
Productivity Growth in Mexico: An Economy in Slow Motion
Understanding Local Differences in Productivity
Economywide Productivity Drivers and Job Dynamics
Raising Productivity through Participation in Global Value Chains
Financial Constraints and Misallocation
Innovation, Technology, and Management as Drivers of Productivity
Each chapter contains policy recommendations that will help offset the listed issues.
Trade Issues Looking Ahead
Several weeks ago, the firm of Thompson Hine did a webinar on trade matters, “What Will Happen in International Trade in 2023?” The topics were similar to the presentation given by John Murphy of the US Chamber of Commerce and discussed in our last Update – but with more details in some areas. On Section 301 tariffs, the levels will likely continue. Although many product exclusions have expired, some may continue through this September and new ones may be added. The presenters list “Best Practices” for handling 301 matters. There was a detailed discussion of the Uyghur Forced Labor Prevention Act (UFLPA), signed into law and becoming effective on June 21, 2022, and how this will affect importers who will have to show supply chain mapping for the imported good indicating it was sourced outside of the Xinjiang region. With the continued restructuring of supply chains, proving origination and substantial transformation will be more important in order to meet USMCA rules.
The presenters also discuss the new rules being introduced by new legislation. These include the Inflation Reduction Act (IRA), the Buy America Act, and the Build America, Buy America (BABA) provision of the Infrastructure Investment and Jobs Act. On the trade front, the Biden Administration themes are:
Focus on worker-centric trade policy and agreements
Move beyond traditional FTAs
Pay attention to values, the “new global code of conduct”: worker rights, better labor conditions, environmental standards, anti-corruption, stable business investment climate, national security concerns, and resilient supply chains
Other New Rules to Watch for Importers
On February 8, in his State of the Union address, President Biden detailed his standard to require all construction materials on federal infrastructure projects to be made in the US. The Office of Management and Budget (OMB) on February 9 released proposed rules on the subject. Thompson Hine provides details in “OMB Issues Proposed Rule and Guidance on U.S.-Made Construction Materials in Infrastructure Projects.” The rules would standardize implementation of the Build America, Buy America (BABA) provisions of the Infrastructure Investment and Jobs Act. The construction materials covered include nonferrous metals; plastics and polymer-based products; composite building materials; glass; fiberoptic cable; optical fiber; lumber; and drywall. For each material, all manufacturing processes must be done in the US. Companies that work on federally funded construction projects need to monitor evolving domestic preference standards to ensure that they are not using imported materials in these projects.
Upcoming Webinars
Our Mid-America Chapter of the Chamber has set its sights on a number of webinars for the next few months at least. The first, “Mexico in a World of Electric Vehicles,” will be held on Wednesday, April 19, from 1:00 to 2:30 pm CDT. You will be receiving an announcement and registration materials shortly. Please plan to join the conversation!