By The Center for Binational Institutions *
Institutional Context
The United States-Mexico-Canada Agreement (USMCA) entered into force on July 1st, 2020. This agreement is an update of the North American Free Trade Agreement (NAFTA), and it aims to better respond to the challenges of the 21st Century economy. Some of the main differences are related to copyrights, enforcement measures, and transparency. The USMCA also has new chapters on Good Regulatory Practices (GPR), Digital Trade, Small and Medium-Sized Enterprises (SME), Environment, and Labor.
The Automotive Industry – The USMCA promotes the reshoring of vehicle and parts production, and incentivizes new investments in the sector through increased Regional Value Content (RVC) requirements; new requirements for vehicle producers’ procurement of North American-sourced steel and aluminium; the elimination of loopholes that undermine RVC thresholds; new Labor Value Content (LVC) rules; and the reduction of the administrative burden on vehicle and parts producers.
Automotive Rules of Origin – In order to incentivize investments in the North American (NA) region in the automotive sector, NAFTA’s Rules of Origin (RO) have been updated. Appendix to Annex 4-B of Chapter 4 of the USMCA includes the requirements; and Appendix part 182 provides the definitions applicable to automotive goods, RVC and LVC requirements.
Controversy in Automotive Rules of Origin
The USMCA’s stricter Rules of Origin for automotive products set a higher threshold of regional content to qualify for tariff-free treatment; it went up to 75 percent from 62.5 percent. This change in percentages gave way to the current controversy among the three nations. On August 20th, 2021, Mexico formally requested consultations with the United States in accordance with Article 31.4 (Dispute Settlement) of the USMCA. Mexico argued that the U.S. requirements imposition on motor vehicle manufacturers were inconsistent with the RO agreed on in the USMCA. On August 26th, 2021, Canada decided to participate in the consultations as well.
Mexico claims that the Rules of Origin allow automotive parts that have acquired origin by meeting a Regional Value Content threshold to be considered fully originating when used as inputs in a finished vehicle. This roll-up methodology gives more flexibility to producers of finished goods to comply with the RO, thus qualifying for preferential tariff treatment. In comparison, the United States argues that the USMCA does not allow the use of roll-up methodologies for certain core parts; a position consistent with the USMCA objective to reduce the use of foreign content in the automotive supply chain.
Consultations took place on September 24th, 2021, but the dispute was not solved. Therefore, Mexico has requested Panel Proceedings, and on January 13th, 2022, Canada joined the dispute as a complaining Party, in accordance with Article 31.6.5 of the USMCA. As established in Chapter 31 of the Agreement, an independent panel will convene to determine whether the United States position is inconsistent with the USMCA. The next steps in the settlement process are: (1) composition of the panel (to be completed no later than 40 days after the panel request); (2) circulation of an initial panel report no later than 180 days after the appointment of the last panelist; and (3) circulation of a final panel report within 30 days after the initial panel report. The panel is expected to issue its final report by September of 2022.
This report must contain: (1) “findings of fact;” (2) determinations as to whether the measure at issue is inconsistent with obligations in the Agreement, or a Party has otherwise failed to carry out its obligations in the Agreement; and (3) recommendations, if the disputing Parties have jointly requested them, for the resolution of the dispute. If the panel finds that the United States has in some way failed to carry out its obligations under the USMCA, the disputing Parties must then agree on the resolution of the dispute. If they are unable to do so within a 45-day period, the complaining Parties could suspend the application of benefits for the United States, until they agree on a resolution.
It is also important to note that the USMCA’s Rules of Procedure allow the panel to consider written views by non-governmental bodies during the course of the dispute. The automotive RO dispute is an important test for the USMCA and its dispute resolution mechanisms. Furthermore, the outcome will have relevant implications for automotive supply chains in North America.
* The Center for Binational Institutions’ mission is to promote a better understanding of the bilateral institutions between Mexico and the United States. It is a program by the U.S. – Mexico Foundation. The U.S.-Mexico Foundation is a binational non-profit organization dedicated to fostering bilateral cooperation and improving the understanding between the United States and Mexico by activating key people in the relationship that once were dormant. Twitter: @usmexicofound
