New rules embedded in the United States-Mexico-Canada Agreement (USMCA) will make it difficult for Canadian dealers exporting used vehicles to the U.S. to prove that the vehicles meet the necessary requirements under the new rules of origin.
The USMCA implementation date was July 1, doing away with the previous 26 year-old NAFTA trade deal as the new one is pressed into law. With it comes a whole new set of rules around exporting vehicles across the border, from Canada to the United States and vise versa, according to Brian Murphy, Vice President of Research & Analytics at Canadian Black Book.
“The bottom line is that vehicles that were not manufactured in the U.S. or don’t meet U.S. content rules can be taxed 2.5 per cent, unless they can prove that they are exempt under the USMCA agreement,” said Murphy, in an interview with Canadian auto dealer. “And then light trucks (pickup trucks) or vans that have two seats in them, they are subject to a really old rule of taxation called the Chicken Tax. They can be taxed 25 per cent — so that’s a massive tax.”
Murphy said that with the old NAFTA, exporters could get a certificate of compliance that would allow the vehicle to cross the border without paying any tariffs. With the USMCA, those are no longer valid.
Asked what the impact would be on Canadian dealers exporting vehicles to the U.S., Murphy said pickup trucks are the most severe example of an impact.
“If you were a dealer in Canada purchasing vehicles at auction or taking trades and then exporting them to the U.S., any vehicles that were not made in the U.S. — any pickup trucks that were made in Canada or made in Mexico — you would be very unlikely to export those to the U.S., because by the time you paid a 25 per cent tariff, it probably doesn’t make business sense anymore to ship the vehicle,” said Murphy.
It should be noted that the overall export issue in the USMCA, around used vehicles, may only impact a small percentage of dealers in Canada. And then there is also a positive side to the situation.
Murphy said one of the frustrations for Canadian dealers at auction looking to buy vehicles has been that they are often outbid by bidders who want to buy vehicles and ship them to the U.S. But now, some of those vehicles — the ones that are not as attractive to export anymore (such as a Canadian- or Mexican-build pickup truck) are unlikely to be outbid by someone looking to ship that vehicle.
“So there is a good opportunity for them to buy that vehicle and sell it here in Canada,” said Murphy. “There is good and bad to this, it’s not necessarily all bad.”
For Oumar Dicko, Chief Economist at the Canadian Automobile Dealers Association (CADA), the issue is whether or not U.S. customs will enforce the tax right away, given the tricky situation for used vehicle exporters.
“The U.S. Customs and Border Protection — the customs at the border — we don’t know yet what their policy will be in that regard,” said Dicko. “All we know is that if they (the U.S.) decide to enforce it, it’s going to be extremely hard or impossible for Canadian exporters of used vehicles, who are exporting vehicles to the United States, to prove that their vehicles meet the requirements of the rules of origin. It’s also impossible to prove because these rules are new.”
Dicko said the new requirements include a statistic that was not tracked in the past. Here is what this means: for a manufacturer under NAFTA, there were rules of origin which they tracked. Now, under the USMCA, there are new rules that include the origin of steel and aluminum used in production that was not part of NAFTA and therefore was not tracked.
The new rules of origin under USMCA are as follows: a 75 per cent regional value content requirement (up from 62.5 per cent); strong content requirements for core parts (i.e. engines and transmissions); a 70 per cent North American steel and aluminum requirement; and a labour value content requirement, as per the Government of Canada.
“If the United States customs decides to enforce the agreement at the border for used vehicles, it becomes a problem because it will be quasi impossible for somebody exporting these vehicles to the U.S. to prove that the vehicle actually met the requirements,” said Dicko.
He said the onus is not on the manufacturers but on the exporter to find that out. “So it’s going to create a lot of red tape.”
It may also be worth noting that the USMCA was implemented on Canada Day, but the original implementation date was scheduled a little later than that, possibly around the fall period. Had that date remained, CBB’s Brian Murphy said there may have been more clarification provided by U.S. customs about what would happen on a day-to-day basis at the border.
“There is still some expectation by some of the folks in the industry I talked to; they think there may be some clarification that, maybe there will be some grandfather on the vehicles, that they can still freely pass,” said Murphy. “It’s hard to say at this point in time. What our sources are telling us is that, as of today, if a vehicle wasn’t made in the U.S., it’s going to be taxed accordingly.”
