This article examines what is in store for the automotive industry under the Biden administration.(1) 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 organised their commercial relationships accordingly. The growing role that international trade rules are playing has led many corporate leaders to look beyond regularly imposed tariffs. Recent additions to trade agreements include deep-reaching requirements on non-tariff issues, such as labour provisions, which have become intrusive to the entire supply chain – and none more so than the automotive parts industry.
Tariffs and automotive parts: transparent and measurable to the bottom line
Arguably, there is a common theme among these developments – namely, that forthcoming decisions in Washington in the trade arena will seek to counter growing volumes of imports from China by using existing legal authority while injecting expanded and new enforcement tools.
Former 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 the Biden administration, at least during the first year. This is not because President Biden favours these added costs but simply because his approach on the role of trade policy, particularly with regard to 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 (eg, Vietnam) have been attracting attention.(2)
The new president is not a stranger to the automotive sector as witnessed during the Obama era when then-Vice President Biden led efforts to bolster the sector. For these reasons, mechanisms to seek tariff exemptions may be resurrected and even broadened.
Trade enforcement of USMCA: at the border and beyond
Many automotive executives know that US Customs and Border Protection (CBP) will be in full enforcement mode in regard to tariff preference certifications and claims under the US-Mexico-Canada Agreement (USMCA).(3) 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 labour content in automotive vehicles. CBP will be supported in these efforts by an eager Congress and energised departments within the administration. Concerns of product trans-shipment will rank high, especially products which claim origin from third countries but are suspected of originating in another country, particularly China.
These enforcement activities are expected to become a priority for CBP in 2021. For automotive companies that have delayed evaluating their USMCA programmes or simply extended their North American Free Trade Agreement qualifications to the USMCA without the necessary due diligence, these enforcement actions could be costly in the form of additional tariffs and the resources needed to remedy these USMCA deficiencies if not addressed and corrected beforehand.
'Unfair' trade investigations: widely expensive and corporate brand risk
The new administration is aware of the importance that the recent Regional Comprehensive Economic Partnership (RCEP) will play in the global marketplace and perceived threats to US competitiveness. There is growing concern in Washington over this new powerful trading bloc and it will be interesting to see how that concern will translate into more and expanded US trade investigations by the Department of Commerce and other agencies.(4)
The RCEP was formally ratified on 15 November 2020 and so its impacts are yet to be fully realised. The trade deal comes on the heels of the signing of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership(5) (to which the United States is not a party). Combined, they will add to Washington's worries of unfair competition.
For these reasons, nuanced but hugely impactful developments in US trade remedy rules have already been seen, especially regarding the differing regulatory definitions of 'product origin' and 'scope' of products. This trend is expected 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.
Forced labour: more data and more scrutiny
As one of the most visible and growing import enforcement priorities, a broader swath of imports into the United States is being scrutinised to deter the use of forced labour – in particular, within regions of China.(6) One certainty of the new administration's trade agenda will be a high-profile and vigorous forced labour 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 recent years, CBP has added a robust forced labour component to its audit programmes, with automotive companies having been the recipient of a number of these assessments. Companies that can identify and analyse 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 labour used in the production of imported automotive goods, as well as the mining of materials used to produce them.
Export controls: China and emerging technologies remain priority and pose supply chain challenges
In 2020 export controls were on a wild ride and this turbulence is not expected to end any time soon.(7) 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 Department of Commerce Bureau of Industry and Security (BIS) has been slow to identify emerging technologies and the Biden administration is expected to continue to take a measured approach to which emerging technologies to control. Among the technologies identified in the 2019 advanced notice of proposed rulemaking were AI, machine learning and other technologies relevant to the auto industry.
To date, there have been only 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, although it is likely that the Biden administration will issue controls on semiconductor technology and software, at a minimum for the somewhat amorphous 'military end users'.
Hopefully, the COVID-19 pandemic will come to some end in 2021. While an early priority for the new president, he will be equally 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. Companies should strategically assess their operations to meet new and emerging trade policy goals – because the bottom line for many is not only the profit margin but also the company brand in a competitive international market.
Endnotes
(1) For further details on other trade issues under the Biden administration, please see "Advance Look at Hot Button Trade Issues under the Biden Administration".
(2) For further details please see "Products from Vietnam Facing Additional Tariffs: Section 301 Currency Undervaluation".
(3) For further details please see "The Wait is Over: USMCA Border Enforcement Begins".
(4) For further details please see "China's RCEP Victory: New Import and Export Challenges".
(5) Also known as the 'TPP-11'. This agreement took effect on 30 December 2018. Members are Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.
(6) For further details please see "US Ban Certain Imports: Buyer Beware".
(7) For further details please see "US Export Controls: Business as Usual?".
