Tariff threat looms over battle for used cars

U.S. retailers urgently looking north for used-vehicle inventory amid the microchip crisis face another potential burden: tariffs.

Industry trade groups in the U.S. and Canada are imploring the Biden administration to back away from a Trump-era interpretation of the United States-Mexico-Canada Agreement that they say could make most used vehicles shipped to the U.S. subject to import duties.

"The previous U.S. administration took a more restrictive interpretation of the new USMCA rules [by] saying the new rules of origin on vehicles moving forward should also be applied retroactively on used vehicles from a few years ago — which, quite frankly, is completely nonsensical," said Tim Reuss, CEO of the Canadian Automobile Dealers Association.

At issue are used vehicles produced before USMCA went into effect. As of July 2020, the trade pact raised regional-value content requirements and introduced labor-value content rules that must be met for a vehicle to cross borders without being subject to import duties.

The industry groups say the U.S. government has interpreted the rules to mean that vehicles made before July 2020 are still subject to USMCA requirements, not those under the preceding North American Free Trade Agreement. As a result, U.S. dealers who purchase used vehicles from Canada or Mexico are in some cases being slapped with tariffs or at least warned that they could be subject to them in the future.

The U.S. interpretation applies to vehicles imported from Mexico, but it likely causes the most headaches at the Canadian border.

According to Cox Automotive Canada, about 300,000 used vehicles are typically shipped from Canada to the United States annually as U.S. dealers look to take advantage of a favorable exchange rate.

"It's not a good situation for our dealer members that have relied on exporting some of these vehicles to the U.S. and for quite a few U.S. dealers that have relied on that volume," Reuss said.

It's an issue of particular importance this year as dealers on both sides of the border contend with a shortage of new and used vehicles resulting from the global microchip shortage. While supply is low, demand for vehicles is high in the U.S., particularly for crossovers, SUVs and pickups.

Under USMCA, light-duty passenger vehicles that do not meet the trade rules are subject to a 2.5 percent duty. But that increases to 25 percent for trucks, including pickups — which are popular and often highly profitable for dealers in both countries.

"If dealers are trying to get used trucks or cargo vehicles out of Canada, this is potentially quite impactful," said Kristin Dziczek, senior vice president of research at the Center for Automotive Research in Ann Arbor, Mich.

U.S. trade groups are lobbying federal trade and customs officials to change how USMCA rules are applied to used vehicles. They argue that cars and trucks manufactured while NAFTA was in place should be subject to NAFTA-era rules.

In a June 26, 2020, letter to Robert Perez, deputy commissioner of U.S. Customs and Border Protection, U.S. industry groups argued that the government's interpretation could "effectively lead to tariffs being assessed on all used-car trade."

The letter was signed by the presidents and CEOs of seven groups that represent manufacturers and dealers, including the National Automobile Dealers Association and the American Automotive Policy Council. A letter making similar points was sent to U.S. Trade Representative Katherine Tai on March 24, 2021.

All used vehicles could be subject to tariffs "because, as a practical matter, it is impossible at this point to determine whether a vehicle built pre-USMCA meets the new requirements of the USMCA," the letter to Perez reads.

The groups say that is because "there are no records or documentation" for older vehicles that could "feasibly establish that they comply" with new rules-of-origin requirements. The method for determining whether a vehicle meets regional-content value levels is different under USMCA than it was under NAFTA.

USMCA also includes requirements pertaining to labor as well as steel and aluminum content that NAFTA did not have.

"Thus, U.S. importers will be unable to show that vehicles built in the NAFTA region before the USMCA are eligible for duty-free treatment," the letter reads. "Such an outcome would have a devastating impact on used-vehicle commerce among the United States, Mexico and Canada. And this adverse outcome could be exacerbated further if Canada and/or Mexico were to retaliate by rendering used-vehicle imports from the U.S. ineligible for preferential tariff treatment."

The industry groups said tariffs would have a regressive impact on U.S. consumers and would lead to a decrease in the number of used vehicles imported, thus raising prices.

"Since many of these used vehicles are purchased by lower-income customers, the imposition of tariffs would have an especially undue impact on them," the letter reads.

The U.S. trade representative did not respond to multiple requests for comment.

The Canadian government "has raised the issue with officials in the United States and Mexico, and these discussions are ongoing," a spokeswoman for Global Affairs Canada said in an email. "We have had significant engagement with stakeholders on this issue," including the Canadian dealers association.

Even if the Biden administration changes the government's interpretation of the rules, confusion surrounding newer used vehicles could persist, said CAR's Dziczek.

"Any vehicle manufactured after July 1, 2020, is going to have to meet USMCA" requirements, she said. "So it won't be as easy as [saying] this is a 2019 or 2020 model. ... It's going to have to come down to what is the date manufactured for those vehicles that were made in 2020."

Should the administration keep the interpretation of rules indefinitely, the problem could largely resolve itself within a few years, Reuss said. Used vehicles exported to the U.S. from Canada are typically 2 to 4 years old, he said. Eventually, most of those will have been assembled after July 2020, undoubtedly making them subject to USMCA rules.