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The United States Loses Dispute with Canada and Mexico on the Interpretation of the Automotive Rules of Origin Under the USMCA

January 17, 2023

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A five-member arbitral panel (“Panel”) issued its Final Report on the dispute over the interpretation of the automotive rules of origin under the United States-Mexico-Canada Agreement (“USMCA”), marking a win for Canada and Mexico against the United States. The report found that the United States’ interpretation of the rules was “inconsistent” with the USMCA.

The dispute between the three countries, Mexico and Canada as the Complainants, and the United States as the Respondent (collectively, the “Parties”), centered around the methodologies for determining whether a passenger vehicle or a light truck qualifies for preferential trade treatment under the USMCA. The Parties disagreed on the interpretation of the rules concerning how an automotive producer may determine the Regional Value Content (“RVC”) for a passenger vehicle or a light truck. Specifically, Canada and Mexico argued that a producer can determine the RVC of the finished vehicle or truck by relying on any of the several RVC calculations outlined under Article 4.5 of the Agreement and Article 3 of the Appendix on Provisions Related to the Product-Specific Rules of Origin for Automotive Goods (“Appendix”). The United States disagreed and argued for a “bifurcated” approach instead.

The dispute started in August of 2021 when Mexico requested consultations with the United States on the interpretation of the automotive rules of origin and the calculations of RVC under the USMCA. Later, Canada joined Mexico. In November 2022, the Panel issued its Initial Report on the dispute and allowed the Parties to provide their comments pending issuance of the Final Report.

After reading the Parties’ comments on the Initial Report, the Panel was still not persuaded by the United States’ reading of the rules of origin under Chapter 4. Thus, in its Final Report, the Panel ruled that the United States’ existing requirements for passenger vehicle and truck manufacturers seeking preferential treatment are inconsistent with the agreement. This ruling deemed the United States in breach of the trade deal.

USMCA’s Chapter 4 sets out the rules of origin that guide producers of many types of goods in determining whether their goods qualify as “originating” under the Agreement and are thus eligible for preferential tariff treatment. However, these rules of origin are highly complex and require many layers of calculations.

Chapter 4 also has several annexes that address specific rules of origin. Specifically, relevant to automotive goods is the Appendix. Canada and Mexico’s reading of the Appendix advocated for a “rolled up” calculation of RVC components to satisfy the requirements of the agreement. Meaning, if a car engine was made with 80% RVC parts, then it would be “rolled up”, indicating that 100% of the engine’s value of the finished car is regionally sourced for purposes of RVC calculations. The United States, on the other hand, advocated against the “rolled up” approach and argued that the RVC of core parts and that of the finished car should be calculated “separately and independently of one another.” Under the United States’ approach, it would be harder for the auto industry in North America to qualify for preferential treatment than it would under the approach taken by Mexico and Canada. The Panel disagreed with the United States, endorsing Mexico and Canada’s approach as the correct one for RVC calculation and consistent with the USMCA.

What’s next?

Under the USMCA, the Parties must “endeavor to agree on the resolution of the dispute” within 45 days. This means that the United States, Mexico, and Canada must meet to discuss and agree on the timeline and steps that the United States will take to comply with the Panel’s report.

If the USMCA Parties are unable to agree within 45 days, Canada and Mexico may suspend benefits of “equivalent effect to the non-conformity” to the United States until the dispute is fully resolved. Since the time the USMCA entered into force on July 1, 2020, there have been two other disputes but any suspension of benefits has yet to be imposed.

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