Canada's announcement follows Mexico's request for a panel pursuant to Chapter 31 of the USMCA on January 6, 2021, to resolve the dispute, after trilateral consultations initiated by Mexico on August 20, 2020, failed to reach a resolution.
The USMCA automotive rules of origin, intended to drive investment in North American production while maintaining the competitiveness of the industry, were controversial during the negotiations and continue to be a source of contention. The rules are new and untested, and other interpretative issues are likely to be uncovered in time.
The Issue: Can the Core Parts Special Flexibilities be Used to Qualify the Vehicle?
- Calculating the North American Content of Vehicles: The dispute concerns different interpretations of the methodologies for calculating a vehicle's regional value content (RVC). The USMCA raised the RVC requirements for vehicles to qualify for duty-free treatment from those under the North American Free Trade Agreement, requiring up to 75% North American content.
- The USMCA categorizes certain automotive parts for passenger vehicles and light trucks into core parts, principal parts, and complementary parts. Each applies different sets of originating rules.
- Core Parts and Special Flexibilities: Along with the increased RVC requirements, core parts of passenger vehicles and light trucks, such as engines, transmissions, and advanced batteries, must also separately meet the rules of origin for the vehicle to qualify. The USMCA contains special flexibilities (e.g., the super-core calculation that treats all of the core parts as a single part for RVC purposes) for calculating the RVC of these core parts to enable qualification more easily.
- Mexico and Canada Favor a More Flexible Interpretation: Mexico, along with Canada, takes the position that the special flexibilities for calculating the RVC of the core parts were intended to be available for calculating the vehicle's RVC. In other words, once a core part qualifies as originating under these special flexibilities, it should be considered 100% originating when calculating the RVC of the vehicle overall.
- US Adopts a Stricter Approach to the Rules: Under the US position, however, these special flexibilities are limited to qualifying a vehicle's core parts for purposes of satisfying only the core parts requirement. When calculating the vehicle's RVC, any foreign content in components that do not originate under the typical RVC rules would need to be accounted for.
- The "Roll-Up" Question: Contrary to a popular misconception, both interpretative positions permit the concept of "roll-up," under which 100% of the value of an originating part can be counted as North American content for purposes of meeting the vehicle's RVC threshold. The Parties disagree, however, on what rules can be used to determine whether a core part is originating when calculating the RVC of a vehicle.
Differing Perspectives: The Impact on the North American Auto Industry
- In a January 13, 2022 statement, Mary Ng, Canadian Minister of International Trade, Export Promotion, Small Business, and Economic Development, said, "The interpretation that the United States adopted in July 2020 is inconsistent with CUSMA and the understanding shared by the parties and stakeholders throughout the negotiations." Minister Ng emphasized that the rules of origin were "the result of negotiations and close consultations with automotive stakeholders" to ensure increased integration across the North American region and support the competitiveness of its automotive producers.
- In an informal translation of a statement released with its request for a dispute settlement panel, the Mexican government stated, "Mexico believes that a panel decision will provide certainty to the automotive industry, benefitting the region's competitiveness."
- After Mexico's request for a panel earlier this month, a USTR official contended that Mexico's interpretation would lower USMCA's regional content value, in a statement to Inside US Trade. "The overarching goal of the USMCA was to raise standards across the board," the USTR official said. "Any interpretation of the automotive rules of origin that effectively reduces the effective regional value content of a vehicle produced in North America runs counter to the goals of attracting new investment, creating well-paying manufacturing jobs, and ensuring USMCA Parties are the ones that benefit from the duty-free treatment for meeting these new rules."
What to Expect Next
- Chapter 31 of the Agreement sets forth the dispute settlement provisions under the USMCA. These procedures include the establishment of a dispute settlement panel, a panel composition process, rules of procedure for panels, and the issuance of a panel report.
- Notably, the USMCA's Rules of Procedure allow a panel to consider requests from non-governmental entities located in the territory of one of the disputing Parties to provide written views regarding the dispute. This provision may allow North American automotive producers and suppliers to weigh in on the dispute.
- No later than 150 days after the date of the appointment of the last panelist, an initial panel report must be issued (except in "exceptional cases").
How Arent Fox Can Help
While the outcome of this particular dispute remains unknown, North American auto producers and suppliers must find ways to navigate the uncertainty and use the current rules to their best advantage to avoid tariffs and mitigate enforcement risk. As a result of these new and novel rules of origin, and while the dispute process takes its course, companies still need to demonstrate reasonable care in meeting US trade regulations.
During this time of enforcement uncertainty, we strongly recommend that companies review their accounting and procurement systems to conduct detailed and accurate analysis of the costs of production and their supply components in order to capture all available regional content values.