With USMCA Done, Supply Chain Professionals Can Get Down to Work

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Procurement and supply chain professionals reacted to the new USMCA trade deal this week with relief that they now know what to focus on in a post-NAFTA landscape — and that they can begin figuring out how the pact fits with ongoing tariff disputes with China.

Trade negotiators on Sunday finalized the U.S.-Mexico-Canada Agreement, a new pact that will replace NAFTA. After about two years of turmoil, the deal was welcome news for supply chain professionals because it removed uncertainty from their planning processes.

“Glad it's done — now what does it look like and how to optimize our bottom line and mitigate any ongoing risk,” said Greg Schlegel, founder of the Supply Chain Risk Consortium.

The American Iron and Steel Institute liked that the three nations stayed together on this deal instead of the U.S. forging individual pacts with Mexico and Canada.

“The relationship between our three countries has been extremely beneficial for the steel industry and resulted in robust trade and investment in the region over the past 25 years,” said Thomas J. Gibson, AISI’s president and CEO. “This new agreement is significant as it will keep our manufacturing supply chains strong throughout North America.”

Canada’s leader touted the USMCA because it removed uncertainty, and Mexico’s leader liked that the deal got done so he could sign it before he leaves office this year.

The U.S. dairy industry gained some access to Canada’s market, and that will change the supply chain there. But the largest supply chain realignment will likely be for automakers.

“The auto industry is one of the biggest sectors that's been impacted by the NAFTA wrangling,” said Rajesh Kalidindi, CEO of LevaData, a provider of artificial intelligence-based sourcing software, in an interview. The industry will see “a constraint impact on the whole margin situation for the auto companies, and they have to look at alternate ways in how they mitigate this risk.”

Rules of Origin Under USMCA

The USMCA deal increased the rules of origin for auto parts, requiring that 75% of parts used in American auto manufacturing come from North America. That’s up from the 62.5% requirement under NAFTA. The new pact levies a 2.5% tariff if those rules aren’t met.

Lisa Reisman, executive editor of MetalMiner, a sister site to Spend Matters, said the way automakers respond to the USMCA changes will come down to the vehicle model in question:

“Some commentators have suggested the regional value content (RVC) requirements for automobiles shifting from 62.5% to 75% or otherwise face a 2.5% tariff penalty will not necessarily generate the desired outcome of bringing jobs and manufacturing back to the U.S./Canada/Mexico. But for small passenger vehicles, which do not generate much if any profit, the penalty appears significant. Automotive OEMs will have to conduct a cost-benefit analysis to determine whether reconfiguring supply chains will represent a lower TCO (total cost of ownership) than paying the 2.5% tariff on the price of the entire automobile. MetalMiner would argue it may make more economic sense to reconfigure supply chains to comply with the new rules.”

If President Donald Trump imposes so-called Section 232 autos tariffs on national security grounds, Mexico and Canada would each get a tariff-free annual quota of 2.6 million passenger cars for export to the United States. That's well above their current export levels, CNBC reported.

The USMCA does not address Section 232 tariffs on steel or aluminum but leaves the door open for further discussion on this specific order by Trump, Reisman said.

John Ferriola, the CEO of steel giant Nucor, lauded the changes to the rules of origin.

“We support increasing the rules of origin requirements for various products that will result in the use of more North American materials, including steel,” Ferriola said. “Increasing these requirements, particularly for automotive production, will benefit North American steelmakers."

How Auto Supply Chains Could Shift

To gauge how difficult it could be for automakers to meet the new rules of origin, consider the 2018 American-Made Index compiled by Cars.com.

The top car, the Illinois-built Jeep Cherokee, has only 72% of its parts from the U.S. and Canada, which is below the 75% threshold under USMCA. (The Cherokee’s top ranking was bolstered because all of its engines and transmissions are from the U.S.)

If the top car doesn’t have enough parts, that means a lot of supply chains will need to weigh whether they should reconfigure how North American parts get into production lines.

A Cars.com analysis of Automotive News data found that cars built in America account for only about 53% of passenger-vehicle sales in the U.S. through the first quarter of 2018.

So about half of U.S. sales will be affected by USCMA changes, and the other half could be subject to pricing-pressure from tariffs on goods from abroad.

Kalidindi, LevaData’s CEO, said changes to the rules of origin and the USMCA’s mandate that auto production have a large percentage of its workforce making $16 an hour will put pressure on prices that may be passed on to the consumer.

China, Tariffs and Prices

And then there are the costs tied to China. The world’s second-largest economy produces much of the world's electronics, which automakers are adding to their products more than ever before.

“The electronics industry is tied to China because that’s how the supply chain is built,” said Bill Michels, a supply chain veteran and a panelist Monday at the APICS 2018 conference in Chicago. “It would take a lot to retool that.”

Kalidindi said the higher costs from the USCMA and the rising expense of tariff-targeted products from China are something that procurement teams will have to account for. “Think of it as a double whammy,” he said.

On China, MetalMiner’s Reisman offered this analysis on the NAFTA replacement deal:

“USMCA will have its greatest impact on China. New rules of origin requirements will make it difficult for importers to circumvent shipments, a big issue for steel producers and major appliance manufacturers such as Whirlpool. Furthermore the new deal adds ‘enforcement teeth’ to currency manipulation as well as overtly articulates that China is not a market economy. Both Canada and Mexico will now need to provide the U.S. with three months notice should either country negotiate a trade pact with any non-market economy country. Should China or Mexico seek to enter into such a trade agreement, that country must provide six months’ notice to the other countries to terminate the three-way deal and replace it with a bilateral one.”

Michels, the head of CIPS for North America, had some advice for an APICS 2018 audience member who was concerned about how to get in front of tariffs.

Procurement departments can try to reclassify commodities so they aren’t affected by tariffs, Michels said. One example he gave was sugar, a highly regulated commodity. Organizations could consider moving the production of a pudding product abroad to add the sugar, then ship the finished product back, avoiding the specific costs targeting sugar. Michels also suggested that supply chain managers explore relationships with countries that have exemptions from the tariffs that the managers face.

On the USMCA talks, Trump used hardball tactics against Mexico and Canada to get them to come to the table and agree to terms they once fought, like Canada easing somewhat on its dairy industry protection. But the next big trade challenge is China, which may have more leverage to buffer Trump’s bluster.

Of the future talks with China, Kalidini said: “It's not going to be a cakewalk.”

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  1. BD:

    72% is just for United States and Canada, the Jeep Cherokee also has 18% parts content from Mexico. This puts parts from North America at 90% well above the 75% threshold.

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