Since this summer, representatives from the U.S., Canada and Mexico have met at intervals to re-negotiate the North American Free Trade Agreement (NAFTA), the 24-year old regional trade agreement. The most recent round of talks ended on January 28 and the parties appear to have reached an impasse on automotive content, among other things. U.S. proposals relating to automotive content have garnered the concern of automotive industry groups – and with good reason.
From the outset, the U.S. proposal regarding automotive rules of origin has been a sticking point in the negotiations. NAFTA rules of origin limit the components from non-NAFTA countries that a product may contain. If the product exceeds those limits, it does not qualify for duty-free status. The U.S. has proposed changing existing rules of origin to require automobiles to have 50% U.S. content, and raising regional (i.e. North American) content requirements from 62.5% to 85%. This proposal presents a multitude of issues for automotive suppliers, their contracts upstream and downstream, and their business as a general matter.
As an initial matter, suppliers commonly enter into life-of-the-program supply contracts. But continuing under these types of contracts with a non-NAFTA nation-based supplier may no longer be possible under the proposed rules of origin content requirements. Buyers may have no choice but to exercise their termination rights under long-term contracts to move procurement to a U.S. based supplier or NAFTA nation supplier. Depending on whether and what termination rights were negotiated up front with existing suppliers, buyers could be left “holding the bag” so to speak when it comes to the supplier’s raw materials, work in progress, finished product and possibly more.
Equally troubling for industry groups is the U.S.-proposed five-year sunset provision on a revised agreement, which would require NAFTA nations to go through a re-negotiation process again in five years. This is especially problematic for long-term supply contracts that are one of the hallmarks of the automotive supply industry. Just about the time suppliers adjust their business and contract relationships to meet the new rules of origin requirements, the entire system could be upended once again.
To the extent you have existing long-term contracts with non-NAFTA nation-based suppliers, it is an excellent time to review those contracts with an eye toward determining whether your termination rights and/or force majeure clause may provide a defense to continued performance in the event of a major revision to NAFTA. Attorneys in our automotive industry group have expertise in supply chain terms and conditions. We often assist clients in reviewing terms and conditions to identify areas of exposure and risk, and will gladly undertake this review and offer advice on how to protect your business and contracts in the event the U.S. proposals discussed here are incorporated into a new agreement. On the flipside, it is also a good idea to review your contracts with your customers to see if there is a mechanism by which any increased tariff costs could be passed through.
The last round of NAFTA talks are scheduled for late February 2018. At this point, U.S. proposals are just that, and the actual terms of any revised agreement are uncertain. Warner will be keeping a close eye on these negotiations and their potential impact on your business and your contracts, and will provide timely updates through email alerts or blog posts. However, if you have questions regarding this topic and other contract issues, please get in touch with your Warner Automotive Industry Group attorney today.