Mexico, Canada and Automakers Just Caught a Big Free Trade Break

Photo: Scott Olson (Getty Images)

New NAFTA just got a little better for Mexico and Canada, General Motors is doing all that it can to be “resilient” amid supply chain headaches, and an airbag maker that is not Takata is under investigation by the government. All that and more in The Morning Shift for Friday, December 9, 2022.

1st Gear: A Win for our Allies

The United States, Mexico, and Canada replaced the North American Free Trade Agreement with a new system in the summer of 2020. In the more than two years since it passed, the document’s automotive rules of origin have remained a sticking point for Mexico and Canada. Put simply, the two countries interpreted the language around “regional content” more favorably — critical, because cars need to consist of at least 75 percent North American-sourced material to trade duty-free.

The three parties settled this dispute back in November, but the deal wasn’t publicized until today. It’s a win for Mexico and Canada, who seem to have gotten the agreement clarified in exactly the way they desired. From Bloomberg via Automotive News:

Both Mexico and Canada believe the USMCA stipulates that more regionally produced parts should count toward duty-free shipping than the U.S. wants to allow. Motor vehicles are the top manufactured product traded between the three countries.

The U.S. had insisted on a stricter method than its neighbors say they agreed to, in order to tally the origin of core parts including engines in the overall calculation. That makes it harder for plants in Mexico and Canada to meet the new threshold of 75 percent regional content, up from 62.5 percent under Nafta, in order to trade duty-free.

For example, if a core part uses 75 percent regional content, and thus qualifies under that requirement for duty-free treatment, Mexico and Canada argued that the USMCA allows them to round the number up to 100 percent for the purposes of meeting a second, broader requirement for an entire car’s overall regional content. The U.S., however, didn’t want to permit rounding up, making it tougher to reach the duty-free threshold for the overall vehicle.

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In basic terms, imagine, for the sake of argument, that a vehicle consists of two parts. Let’s suppose Part A used 90 percent regional content, but Part B utilized only 55. Only Part A would have satisfied the 75-percent requirement for tax exemption, meaning it’d ship duty-free.

As Mexico and Canada interpreted the law, Part A would have then counted fully, 100 percent as a North American-origin part in the vehicle’s overall build, where there’s a second requirement that 75 percent of all components must originate in member nation for the car, wholly, to be tax exempt. Figure that if Part A is coded at 100 percent, it’s easier for Mexico and Canada to reach at least 75 percent in the overall build. But if it’s still clocked at 90 percent — as the U.S. says it intended the law — it’d be tougher for the car, cumulatively, to cross the threshold.

The U.S.-Mexico-Canada Agreement had the effect of making everything more expensive for consumers and automakers, in the name of bolstering free trade partners — sort of like the Inflation Reduction Act is doing for electric vehicles. As AutoForecast Solutions’ supply-chain specialist Sam Fiorani told Bloomberg:

“Providing this amount of wiggle room in the calculations has the potential to lower prices for end-product and increase profitability as automakers seek out lower costs on some components,” Fiorani said in an interview. “Instead of lowering prices, the new rules increased the pricing of North American vehicles, as reaching the set domestic-content levels would be very difficult.”

2nd Gear: GM Is Diversifying

The pandemic and resulting semiconductor shortage pretty much taught automakers that you don’t put all of your eggs (contracts) in the same basket (suppliers.) You have to have a plethora of partners, so a break in any one chain doesn’t sink your entire business and make everything suck for everybody, as it has for the last two-and-a-half years. General Motors understands this now, as CEO Mary Barra recently relayed during a meeting with automotive media. From Automotive News:

The automaker wants battery suppliers, many of which are new to working with GM, to source from multiple locations as it begins to secure materials for EV production starting in 2026, Barra said at an Automotive Press Association event in Detroit. GM learned from its approach to securing microchips for future production so the company is not as reliant on any one factory, she said.

Adding redundancy in the supply chain would help to prevent production stoppages created by issues at a single supplier, such as the COVID-19 outbreak that took a Malaysian chip factory offline last year. It also will be crucial as vehicles require more chips to power the software and technology built into them, she said.

GM says it has signed agreements with suppliers to secure all of the necessary battery materials to produce 1 million EVs in North America in 2025.

“We want to have a partnership where we both win together,” Barra said. “A lot of times, these are suppliers that are new to us, and so I’m excited about how we’re proceeding on that. And like I said, why do I feel confident? Because we got signed agreements. And we’ll just keep building on that.”

The global supply chain bottleneck has been pretty unprecedented, but carmakers must have thought their flow of materials was pretty resilient and dependable before the world came crashing to a halt. So while I’m inclined to believe GM and others are better prepared now than they would’ve been in February 2020, I’m also unsure we’ll ever really know how prepared until it’s tested by another calamity.

3rd Gear: NHTSA Probes Airbag Supplier

You know about Takata, but have you heard of ARC Automotive? The Tennessee-based airbag supplier has also been linked to faulty, potentially injurious inflators, and now the National Highway Traffic Safety Administration has reached out to “roughly a dozen” carmakers and suppliers to investigate what’s going on. Courtesy Bloomberg by way of Automotive News, once again:

The National Highway Traffic Safety Administration sent out letters this week seeking information from the companies about the number of vehicles produced with potentially faulty parts made by ARC Automotive Inc.

The agency is also seeking information about how the companies evaluated whether the air bags would deploy normally in a crash, without a potentially dangerous rupture that could harm passengers, according to the documents posted on NHTSA’s website.

The letters highlight how air bags at risk of exploding in a crash continue to haunt the auto industry even after recalling tens of millions of vehicles with defective parts, made by the now-defunct Takata Corp., that were linked to several deaths.

Separately, NHTSA began investigating air bag inflators made by ARC Automotive in 2015, covering millions of additional components made as far back as 2004. The most recent letters in that probe are focused on parts made by ARC between 2010 to 2018. The letters were reported earlier Thursday by the Wall Street Journal.

As Dieselgate taught us, if one company is breaking the law in an egregious, blatant way, chances are somebody else is doing it too.

4th Gear: VW Thinks Over Plans

By now, Volkswagen was supposed to have some insight into where its next European battery plant was going to be. It’s pushing that off for a moment, Reuters reports:

Volkswagen AG and its battery company PowerCo are continuously evaluating suitable sites for their next gigafactory in Europe,” the carmaker said by email on Thursday.

“There is no pressure to act as we take some more time for decision-making in light of current circumstances,” it said. “At present, there is no impact on planned start of construction or start of production.”

The European Union fears an exodus of investment to the United States in light of generous green energy subsidies companies are offered under the Inflation Reduction Act, just as energy prices in Europe hit record highs with next year’s supply still insecure.

Sweden’s Northvolt said in October it may prioritise expanding its battery plants in the United States over Europe in light of Europe’s energy landscape.

Blame those high energy prices on the continent, as well as the Inflation Reduction Act, which has convinced most everyone to raise their next factory here. Can we please not call them “gigafactories,” though? Tesla can do what it likes, but copying makes the rest of y’all look so desperate.

5th Gear: Model Y on Hold in China

Tesla will end Model Y production in China with whatever the opposite of a bang is, shutting down the lines between Christmas and New Year’s Day, Reuters reported Friday:

The suspension of assembly at the end of the month would be part of a cut in planned production of about 30% in the month for the Model Y, Tesla’s best-selling model, at the Shanghai factory, the two people said.

The Shanghai factory, the most important manufacturing hub for Elon Musk’s electric vehicle company, kept normal operations during the last week of December last year.

It has not been an established practice for the plant to shut down for a year-end holiday, the two people said.

If Tesla sticks to its current plan, it’ll build 20,000 Model Ys over three weeks in December, compared to 39,000 over a similarly long period in November. Nobody really seems to know why the company is doing this, but weakening demand is thought to have something to do with it. Tesla has been slashing prices in the country as of late, after all.

Reverse: You’d Never Guess

How old do you think the U.K.’s first toll highway, the Midland Expressway, is? Wrong. It just turned 19 today, per 365 Days of Motoring. Road Traffic Technology has an interesting article chronicling its development. Thank god for the internet.

Neutral: This Is the Time to Go to Vegas

Specifically, two weeks before Christmas, in the middle of the week. I was in town to drive the new McLaren Artura, and the company put us up on the Strip. I’m not really a Vegas person, but as someone who has only ever been in town for the shitshow that is the Consumer Electronics Show, I was relieved at the lack of traffic, the general ease of the airport experience, everything. It was nice.