The US Automotive Industry: Global Players Facing Tightened US Trade Rules

Earlier this month, we published our “Advance Look at Hot Button Trade Issues under the Biden Administration.” Today we take a deeper look into what is in store for the automotive industry. The application of US trade actions in this highly integrated industry means that US trade action on one company’s product in the automotive supply chain will be felt by another.

Automotive executives understand how their supply chains are interconnected and have organized their commercial relationships accordingly. The growing role that international trade rules are playing has left many corporate leaders to look beyond regularly imposed tariffs. Recent additions to trade agreements include deep-reaching requirements on non-tariff issues, such as labor provisions, which have become intrusive to the entire supply chain. And none more so than the automotive parts industry.

In our broader piece, we discussed 25 areas of trade policy. Here, for automotive executives, we highlight five. While we begin with the tariffs on US imports, we end with possible market restrictions on US automotive exports.

1) US Tariffs and Automotive Parts: Transparent & Measurable to the Bottom Line

In our view, there is a common theme among these developments - that forthcoming decisions in Washington in the arena of trade will seek to counter growing volumes of imports from China and this by using existing legal authority while injecting expanded and new enforcement tools.

President Trump made full use of executive powers on several fronts, including the authority to apply unilateral tariffs on a wide range of US imports. These double-digit tariffs are commonly referred to as 232 and 301 tariffs – the former applied to thousands of products globally and the latter applied to imports originating in China.

Critical components and raw materials used in the automotive sector were caught in the mesh. This will continue under a Biden Administration, at least during the first year. This is not because President Biden favors these added costs but simply because his approach on the role of trade policy, and particularly vis a vis China, will take some time to develop.

What may change in the nearer term is how the new Administration will provide tariff relief in the form of tariff exclusion requests. While China will continue to be top of the US worry list, other trading partners, e.g. Vietnam, have been attracting attention, as we note in “Products from Vietnam Facing Additional Tariffs: Section 301 Currency Undervaluation.”

The new president is not a stranger to the automotive sector as witnessed during the Obama era when then-VP Biden led efforts to bolster the sector. For these reasons, mechanisms to seek tariff exemptions may be resurrected and even broadened.

2) US Trade Enforcement of the USMCA: At the Border & Beyond

In “The Wait is Over: USMCA Border Enforcement Begins,” we confirm what many automotive executives know – US Customs and Border Protection (CBP) will be in full enforcement mode in regard to tariff preference certifications and claims under the USMCA. This will translate into increased use of current enforcement tools to hold companies responsible for complying with USMCA rules of origin and the agreement’s new rules on certifying high wage labor content in automotive vehicles. CBP will be supported in these efforts by an eager Congress and energized Departments within the Administration. Concerns of product transshipment will rank high, especially products claiming origin from third countries but suspected of originating in another country, particularly China.

We can expect these enforcement activities to become a priority for CBP in 2021. For automotive companies that have put off evaluating their USMCA programs or simply extended their NAFTA qualifications to USMCA without the necessary due diligence, these enforcement actions could be very costly in the form of additional tariffs and the resources needed to remedy these USMCA deficiencies if not addressed and corrected beforehand.

3) “Unfair” Trade Investigations: Widely Expensive & Corporate Brand Risk

The incoming Administration is well aware of the importance that the recent RCEP[1] will play in the global marketplace and perceived threats to American competitiveness. In “China’s RCEP Victory: New Import and Export Challenges,” we underscore the growing concern by Washington in regard to this new powerful trading bloc and how that concern will translate into more and expanded US trade investigations by the Department of Commerce and other agencies.

The RCEP was formally ratified on November 15, 2020, and so its impacts are yet to be fully realized. The trade deal comes on the heels of the signing of the CPTPP[2] (to which the US is not a Party). Combined, they will add to Official Washington worries of unfair competition.

For these reasons, we have already seen the nuanced but hugely impactful developments in US trade remedy rules, especially in regards to the differing regulatory definitions of “product origin” and “scope” of products. We fully anticipate this trend to continue and accelerate, especially with regard to the Pacific Rim, which presents significant risks and potential disruption to automotive supply chains unless these developments are carefully examined and fully understood.

4) Forced Labor: More Data & More Scrutiny

As one of the most visible and growing import enforcement priorities, a broader swath of imports into the US are being scrutinized to deter the use of forced labor, in particular within regions of China. Details are provided in our article “US Ban Certain Imports: Buyer Beware.” One certainty of the incoming Administration’s trade agenda will be a very high profile and vigorous forced labor enforcement plan.

While the textile and agriculture industries have received most of the attention from CBP in this arena, the automotive industry is not immune. In the last several years, CBP added a robust forced labor component to its audit programs, with automotive companies having been the recipient of a number of these assessments. Companies that are able to identify and analyze its relevant supply chain data will be better able to manage the risks in this area, which could rise to the level of import detentions and bans for violations. Accordingly, the industry should expect and prepare for continued CBP actions aimed at rooting out forced labor used in the production of imported automotive goods, as well as the mining of materials used to produce them.

5) US Export Controls: China and Emerging Technologies Remain a Top Priority and Pose Supply Chain Challenges for Automotive Industry

In 2020, export controls were on a wild ride, and as discussed in our piece “US Export Controls: Business as Usual?” we do not expect the turbulence to end any time soon. China has emerged as a top target for export controls and sanctions. Most notably, there have been ongoing trade restrictions on Chinese entities.

Foundational and emerging technologies continue to be on the horizon. The DOC Bureau of Industry and Security (BIS) has been slow to identify emerging technologies, and we expect the Biden Administration will continue to take a measured approach to what emerging technologies to control. Among the technologies identified in the 2019 Advanced Notice of Proposed Rulemaking were artificial intelligence, machine learning, and other technologies relevant to the auto industry.

To date, there have only been a handful of emerging technology controls, fairly limited in scope and several of which are part of multilateral regimes. On the other hand, no foundational technologies have been controlled at this point, though it is likely the Biden Administration will issue controls on semiconductor technology and software, at a minimum for the somewhat amorphous “military end users.”

The Bottom Line

Hopefully, the ravages of the COVID-19 will come to some end in 2021. While an early priority for the new president, he will equally be focused on the country’s economic recovery. How international trade policy will play in this effort cannot be undervalued or ignored. Changes or expansion in the application of policy and its enforcement will be early and quick.

Compliance is no longer a simple task, nor a sole option to guard against legal risk. We help company executives to “connect the dots” in this dizzying world of trade law, not only to mitigate revenue loss but customer and supply loss. We can assist companies strategically assess their current operations to meet new and emerging trade policy goals – because the bottom line for many is not only the profit margin but the company brand in a very competitive international market.

[1] Regional Comprehensive Economic Partnership

[2] Comprehensive and Progressive Agreement for Trans-Pacific Partnership. Also known as the TPP-11. Became effective December 30, 2018. Members are Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam