USMCA panel rules against US position in automotive origin dispute

In brief

In perhaps the most important decision since the United States-Canada-Mexico Agreement (USMCA) entered into force in 2020 as a replacement for the North American Free Trade Agreement (NAFTA), a USMCA panel ruled on December 14, 2022, that the United States position on certain automotive rules of origin was inconsistent with the terms of the USMCA. The panel agreed with Mexico and Canada that the United States had sought to impose a requirement beyond the scope of the agreement and that the United States’s strict application of roll-up provisions and methodology in the treatment of originating core parts in vehicle regional value content (RVC) calculations were inconsistent with the agreement.

The decision, which was released to the parties late in 2022 but not made public until January 10, cannot be appealed. A statement posted on Twitter by the Office of the United States Trade Representative (USTR) said, “The disappointing USMCA panel interpretation of the agreement could result in less North American content in automobiles, less investment across the region, and fewer American jobs. We are reviewing the report and considering next steps. We will engage Mexico and Canada on a possible resolution to the dispute, including the implications of the Panel’s findings for investment in the region.”

In that regard, and in accordance with Article 31.18 (Implementation of the Final Report), the parties will endeavor to agree on the resolution of the dispute within 45 days from receipt of the final report. If, within that 45-day period the parties cannot agree on a resolution, Mexico and Canada may suspend application of benefits until a resolution is reached.

Action item: Taxpayers potentially affected by this ruling should monitor negotiations among the parties and determine how to proceed once the 45-day period has concluded and the US response is finalized.

Observation: The panel’s decision could provide flexibility for vehicle producers in meeting the vehicle RVC requirements by allowing the core parts to roll up.

Summary of the dispute

As set forth in the panel decision, the dispute concerned the methodologies for determining whether a passenger vehicle or light truck qualifies for preferential tariff treatment under the terms agreed in the USMCA. 

The parties principally disagreed about what the USMCA prescribes concerning how an automotive producer may determine the RVC of a passenger vehicle or light truck. For a vehicle or truck to receive preferential tariff treatment, it must meet or exceed its respective RVC requirement set out in the USMCA. 

In particular, Canada and Mexico argued that the USMCA permits a producer to determine the RVC of the finished vehicle or truck by relying on any of several calculation methodologies specified in the agreement for calculating the RVC of certain vehicle or truck parts, including the roll-up of originating core (super-core) parts in the finished vehicle RVC calculation. The United States argued that the agreement limits a producer’s choices and does not grant it the options identified by Canada and Mexico in that context, but rather considers the overall vehicle RVC calculation and the core parts origination requirement to be separate and independent calculations. 

The US interpretation of those provisions at issue was articulated in approval letters sent by the United States to manufacturers requesting alternative staging regimes (ASRs) under Article 8 of the Autos Appendix and applied by the United States to those manufacturers. ASRs are transitional instruments proposed by auto producers and approved by one of the parties that permit a producer to import passenger vehicles or light trucks under a different set of requirements from the general terms of the USMCA until January 1, 2025. 

Mexico and Canada challenged this US interpretation as inconsistent with the USMCA. In particular, Mexico and Canada argued that the provision of the ASR approval letters under which “the calculation for a vehicle’s RVC and the calculation for the core parts requirement in Article 3.7 of the [Auto Appendix] are calculated separately and independently of one another” is inconsistent with the USMCA. Specifically, Mexico and Canada dispute the US interpretation of Article 3.7 and its relationship with Article 4.5.

Article 4.5 is central to the dispute. It deals with the ways producers can determine the RVC of goods that are traded between the parties. Article 4.5.4, commonly referred to as the “roll-up” provision, applies when a good that qualifies as originating under the USMCA is used as an input in the production of a subsequent good. 

Roll-up allows the producer to disregard the value of any non-originating inputs used to produce that good when calculating whether the subsequent good meets its required RVC threshold. In other words, if a good is considered produced in the United States, Canada, or Mexico and that good qualifies as originating, then that good is considered 100% originating when used in the production of another good.

The RVC requirements are explained and elaborated in several articles in Chapter 4 of the USMCA as well as the Appendix to Annex 4-B, entitled Provisions Related to the Product-Specific Rules of Origin for Automotive Goods (the ‘Autos Appendix’). The USMCA lays out different required minimum RVCs for the different parts of the vehicle as well as for the finished vehicle; those minimum thresholds are phased in over time. 

The manner through which the parties require producers to determine the RVC of the various parts or the vehicle varies depending on the circumstances, including on the nature of the part. In general terms, the dispute concerned how those determinations are made and how they interact with one another — more specifically, the US interpretation of Article 3.7 of the Autos Appendix and its relationship with Article 4.5 of the agreement.