Have you gone nose-blind?
From a North American auto industry standpoint we have become increasingly used to vehicles being built here and traded “freely” between the North American partners. Yes, there are complex rules of origin that manufacturers have to comply with and yes some Mexican exporters may not be entirely on board (given their continuing MFN exports to the US), but large companies want to build once and sell everywhere so they will do their best to bring their products into compliance with the rules that give them the broadest access to the largest market.
The result of that realignment of the North American industry around USMCA rules is that, after a period of time, it becomes difficult to imagine the world any other way. I described this situation to a friend the other day (who clearly watches too much television) and he likened it to the air freshener ad that warns that you go nose-blind to odours in your home and hence need to purchase air freshener to deal with the unpleasantness. Tariff rules are baked into the free trade agreement, but after a time of living inside that structure we have gone tariff-blind.
None of us were born the last time that the word reciprocity was used to describe a major US trade intiative. But since everything old is new again, it has popped up again in Washington. Heaven only knows what the Trump Administration means by this — we will find out in the coming days. But based on its historical meaning, it would seem to suggest that Washington intends to weaponize MFN tariffs in a way that would see the United States apply the same rate of duty to imports that a foreign country applies to imports of US goods.
So, rather than a general tariff, any product imported to the United States might have dozens of possible tariffs rates depending on where that product was sourced and whether it was deemed to be originating under various trade agreements. If applied over weeks and months, such a change would make it devilishly difficult for global companies to revise their supply chains in order to manage costs. Implemented within days, as the current Administration has been known to do, it would send a painful shock through the global trading system and have unknowable consequences for global supply chains.
So who cares? Hopefully you do. Whether you are an importer or manufacturer or just a consumer, supply chain disruption results in additional costs and potential short term shortages. What is most significant is that trade complexity might also cause reciprocity to backfire on American producers if the policy is not carefully thought out.
Take the case of a car. Under North American free trade rules, a vehicle must meet the USMCA 75% Regional Value Content (RVC) rule and comply with specific requirements for core, principal and complementary auto parts. There is a lot of complexity there but let’s assume for the moment that this means that 25% of the content can come from outside of North America. That is helpful to manufacturers because certain vehicle inputs may be difficult or impossible to source locally or be patented products that you can only source from one supplier globally. A good example of this was a specific paint tint that disappeared from the global auto industry as the sole global supplier was impacted by the Tohoku, Japan earthquake and tsunami in 2011 (https://www.reuters.com/article/business/automakers-face-paint-shortage-after-japan-quake-idUSTRE72P04B/).
Paint aside, if a vehicle, broken down to its smallest pieces contains roughly 30,000 discrete parts, 25% of the value could constitute a huge administrative burden for American manufacturers when trying to account for costs in their vehicles and make changes in their supply chains.
For Canadian manufacturers, this may be less of a problem as Canada maintains a zero rate of duty on parts imported for vehicle assembly. So no complicated accounting and if Washington holds to its word, our zero tariff rate on imported US parts should be met with zero US tariffs on Canadian imported parts. That would be ideal but something tells me there will be a further wrinkle.
Of course, both Canada and the United States are working to keep Chinese products out of the electrified and connected vehicle supply chain, so there are always additional tariff impacts and implications that influence global sourcing decisions. In fact, US and Canadian policy makers have warned against Mexico becoming an assembly point for Chinese parts that would allow Chinese makers to end run North American rules by claiming that the finished vehicles were Mexican made. It is pretty clear that if the Trojan war were to happen today, the horse would be broken down to 30,000 pieces before being reassembled inside your walls.
So we will have to wait and see what the details of the Trump Administration proposal on reciprocity actually entails, but it is not too soon to start thinking about the issue of how tariff costs roll up and impact the landed cost of a finished vehicle.
Part of that assessment comes down to answering the question: “When does a car become a car?”. Was the car already present in all of its parts? In other words, did you just reveal the car that already existed by putting its parts together like a puzzle or was it more than the sum of its parts and at what point did that transformation happen?
These are important questions in the tariff world. I remember purchasing a car in the 1980s that didn’t come with a right sideview mirror. The part was available but was purchased separately from the dealer. Similarly, for a long time, entry level vehicles in Quebec were offered without standard air conditioning but a dealer installed option was available. So how a vehicle is configured when it crosses a border will determine its value for the purposes of duty and may impact the eligibility of the vehicle against the RVC rules of the USMCA, for example.
So if the unthinkable occurs and US actions cause us to lose our tariff-blindness, the industry will once again have to get its calculator out and start to be creative about configuring vehicles in ways that will minimize tariff costs.
Here’s an insight I want to leave you with. We are moving rapidly into the era of software defined vehicles. The systems that allow vehicles to transmit data on the health and location of the vehicle can also be used to deliver various services to drivers that can include optional features and benefits. The presence of these systems affects transaction values between the manufacturing and distribution arms of automakers and drives value for customers. But software is an intangible good that does not need to be included in a vehicle at the time it is shipped across a border and software as a service is not subject to duties. Like that mirror on my 80s car, auto companies need to think about how and when to attach value to their vehicles in a world where tariffs are coming back.
If you are a product planner and want to understand the full implications of the above, I am happy to discuss it with you. If you are a consumer, I think you should expect a change in the way that vehicles are sold if tariffs and counter-tariffs become the new normal in North America. And if you work in customs or logistics, congratulations. I think the events of the past few weeks have just enhanced your job security.
the Beatty Blog 
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