Revving Up - Dispute Over USMCA Auto Parts Rules

On Aug. 20, Mexico requested consultations with the United States on the interpretation of the automotive rules of origin under the US-Mexico-Canada (USMCA) trade agreement. A week later, Canada joined Mexico in the consultation request.  The outcome may impact how car parts are produced in North America for years to come.

Mexico’s request for consultations concerns the calculation of the Regional Value Content (RVC) for purposes of vehicles’ origination under USMCA.

What the USMCA Currently Provides

The Appendix to the USMCA Annex 4-B provides that a passenger vehicle or light truck is originating in North America only if the parts under Column 1 in the below table are originating.

Column 1	Column 2
Parts	Components
Engine	Heads, Blocks, Crankshafts, Crankcases, Pistons, Rods, Head subassembly
Transmission	Transmission cases, Torque converters, Torque converter housing, Gears and gear blanks, Clutches, Valve body assembly
Body and Chassis	Major body panels, Secondary panels, Structural panels, Frames
Axle	Axle shafts, Axle housing, Axle hubs, Carriers, Differentials
Suspension System	Shock absorbers, Struts, Control arms Sway bars, Knuckles, Coil springs, Leaf springs
Steering System	Steering columns, Steering gears/racks, Control units
Advanced Battery	Cells, Modules/arrays, Assembled packs

A part under Column 1 will be originating only if it meets the RVC requirement shown below (except for advanced batteries) by using the net cost method (NCM) or the transaction value method (TVM).

The NCM is calculated by subtracting the value of non-originating materials (including materials of undetermined origin used in the production of the good) from the net cost of the good and dividing the result by the net cost of the good.

The TVM is calculated by subtracting the value of non-originating materials (including materials of undetermined origin used in the production of the good) from the transaction value of the good (excluding any costs incurred in the international shipment of the good) and dividing the result by that transaction value of the good.

Effective Date	Using the NCM	Using the TVM
July 1, 2020	66%	76%
July 1, 2021	69%	79%
July 1, 2022	72%	82%
July 1, 2023	75%	85%

To calculate the RVC for a part listed in Column 1, the vehicle producer has two options to determine the value of the non-originating materials (VNM):

• Calculate the value of all non-originating materials used in the production of the part; or
• Calculate the value of any non-originating components used in the production of the part that are listed under Column 2.

The USMCA also provides alternative methodologies to calculate the RVC for all parts under Column 1 as a “single part” using the sum of the net cost of each part listed in that column.

Under the alternative methodologies, if the RVC calculated meets the threshold under Table 2 above, all parts shall be considered originating and the passenger vehicle or light truck will also be regarded as originating.

The Dispute

Mexico’s position is that once parts under Column 1 meet the required thresholds, those parts are originating regardless of the non-originating materials contained in those parts. In other words, the non-originating materials in the parts under Column 1 roll up into the value of the originating material.

The United States, however, favors an interpretation that would subtract any non-originating materials from the RVC.

Canada has expressed concerns with the interpretation of the United States and has joined Mexico in the request for consultations.

What to Expect

Mexico requested consultations with the United States under the USMCA dispute settlement mechanism. The USMCA Parties must hold consultations no later than 30 days after the delivery of the request.

If disagreement remains, a Panel (comprised of five members) will settle the dispute. Canada could join as a complaining party.

The Panel must issue its final report no later than 180 days after the appointment of the last panelist. Thus, a final decision on the valid interpretation of the rules of origin could be expected by summer next year.

A final resolution to the disagreement between the USMCA Parties is of paramount importance for the auto industry in North America, as the RVC for vehicles reaches its highest threshold to 75% in 2023.

If you have any questions about these developments, please contact Mark Ludwikowski (mludwikowski@clarkhill.com; 202-640-6680); Kevin Williams (kwilliams@clarkhill.com; 312-985-5907); Aristeo Lopez alopez@clarkhill.com Dennis Devaney (ddevaney@clarkhill.com); or another member of Clark Hill’s International Trade Business Unit.