The semiconductor chip shortage has U.S. retailers looking north for used-vehicle inventory, but new tariffs pose a potential burden.

Industry trade groups in the United States and Canada demand that the Biden Administration back away from a Trump-era interpretation of the United States-Mexico-Canada Agreement that makes used vehicles shipped to the U.S. subject to import duties.

“The previous United States 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, frankly, is completely nonsensical,” Tim Reuss, CEO of the Canadian Automobile Dealers Association told Automotive News Canada.

Canada exports around 300,000 used vehicles to the U.S. annually. USMCA regulations dictate that light-duty passenger vehicles that cannot meet trade rules be subject to a 2.5% tariff. Pickups also may be subjected to a 25% tax.

The regulation targets used vehicles produced before USMCA went into effect. The trade pact requires companies to meet raised regional-value content requirements and introduced labor-value content rules to avoid import duties.

The U.S. government interprets the rules to mean that vehicles made before July 2020 fall under USMCA requirements, not those under the preceding North American Free Trade Agreement (NAFTA). Now, U.S. dealers who purchase used vehicles from Canada or Mexico are hit with tariffs or are being warned that they may be subject to them in the future.

The issue is coming to a head as dealers on both sides of the border experience a critical shortage of new and used vehicles. Supply is low and demand is high for vehicles in the United States, particularly crossovers, SUVs and pickups.

U.S. trade groups are lobbying federal trade and customs officials to change how Canada applies USMCA rules to used vehicles. The trade groups seek to ensure that cars and trucks manufactured while NAFTA was in place are subject to NAFTA-era rules.

A June 26, 2020, letter to Robert Perez, deputy commissioner of U.S. Customs and Border Protection, argued that the government’s interpretation could “effectively lead to tariffs being assessed on all used-car trade.”

The presidents and CEOs of seven groups that represent manufacturers and dealers, including the National Automobile Dealers Association and the American Automotive Policy Council, signed the letter. The groups sent a similar letter 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 reads. The groups warn that “there are no records or documentation,” for older vehicles that can “feasibly establish that they comply” with new rules-of-origin requirements.  

USMCA also lists labor requirements and steel and aluminum content regulations that NAFTA did not.

“… 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 it could exacerbate further this adverse outcome 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 warn the tariffs could have a regressive impact on U.S. consumers and decrease the number of imports, thus raising prices.

“Since many used vehicles are purchased by lower-income customers, imposing tariffs would have an especially undue impact on them,” the letter reads.

Vehicles manufactured after July 1, 2020, will have to meet USMCA requirements, said Kristin Dziczek, senior vice president of research at the Center for Automotive Research. “It’s going to have to come down to what is the date manufactured for those vehicles that were made in 2020.”

Reuss said the problem should resolve itself in a few years if the current interpretation of rules stands. Most vehicles exported into the U.S. are two to four years old, he said. Eventually most exports will comprise vehicles assembled after July 2020, making them subject to USMCA rules.