Interpretation of the USMCA’s rules of origin for basic auto parts are hotly contested

In recent weeks, we’ve seen Canada, Mexico and the United States present their legal positions and arguments, often in highly worded exchanges, about how to interpret rules of origin for auto parts under the United States, Mexico and Canada Agreement (USMCA). It is a high-risk problem because assembly processes for vehicles and their “essential parts” (engine, transmission, etc.) inevitably involve long bills of materials with components from many countries, and what is disputed is whether the essential parts were once found to be met USMCA requirements to be ‘original’ whose value can then be calculated as originating value (in another meaning, “rolled up”) is used to calculate the regional value content (RVC) of the vehicle as a whole.

The USMCA has changed the North American Free Trade Agreement (NAFTA) to impose a series of new requirements in the auto sector, including the following:

  • Specific core parts should be shown separately from the vehicle as a whole

  • There must be sufficient level of steel from North America

  • There should be a sufficient level of aluminum made from North America

  • There must be a sufficient level of value for the work content with wages of $16 per hour or more

The crux of the issue in the current dispute is whether a producer, after applying the rules for core parts and determining the origin of the core parts, can then treat them as originating in the vehicle’s RVC account. In particular, Section 3 of the USMCA Chapter 4 Automated Supplement in Sections 7, 8, and 9 provides four alternative methodologies that a producer can use to determine whether or not its essential parts have arisen. The United States asserts that these four alternatives are available to meet the requirements for generating essential parts, but when calculating the vehicle’s fuel consumption rate, only the first of the four alternatives (found in Section 8.a) may be used.

Canada and Mexico indicate that Article 3 of the Automatic Annex, paragraph 9 expressly states that if the spare parts for the essential parts (listed in Schedule A.2 of the Automatic Annex) meet the limit required by an alternative “then each Party shall provide that All parts listed in Schedule A-2 of this Appendix are of origin and that the passenger vehicle or light truck will be deemed to have fulfilled the requirements under clause 7.” They noted that this clause clearly states that the essential parts not only meet the requirements of clause 7, but are “Origin,” a term that has one definition in the USMCA. They also point out that nowhere in the USMCA text is there any indication that the meaning of “origin” changes from one part of the USMCA to another. Once an ‘origin’ is found, the core or supernucleus, they argue, should contribute to the RVC of the vehicle just as any other ‘origin’ component of the vehicle should.

The response of the United States consists mainly of two arguments:

  1. The AutoAppendix Article 3 structure and accompanying tables suggest that testing whether essential parts are originated should be considered separate from how a vehicle RVC is calculated. Canada and Mexico respond to this argument by essentially saying “Separate or not, the USMCA says in Section 9 that the essential parts that meet the test not only meet the requirements of Section 7 but are also ’emergent’, and there is no qualification in Section 9 or anywhere Another limits its inception for one purpose only and not for another.” The core parts that pass the test are, quite simply, “originating” with everything they usually suggest. It seems fair to ask Canada and Mexico: If the United States did not intend that the core part that satisfies the test in paragraphs 7-9 be “origin” for the RVC, then why did they agree to the provision in paragraph 9 that expressly states that “all The parts listed in Table A-2 of this Appendix arise” when you meet one of the alternative tests? Indeed, according to the US interpretation, it appears that the words ‘that all parts of Table A., effect should be given to all words of the text if possible.’

  2. The US also argues that if the Canada-Mexico interpretation were to be adopted, the net effect of the USA’s automatic rules of origin would be to leave a loophole that would require much less North American content than it would otherwise, which was not the intent of the parties. However, Canada and Mexico point out the various ways in which the highest RVC under the USMCA (75% vs. 62.5% under the NAFTA) still has a significant impact on the qualification of auto and auto parts, moreover, accompanied by new USMCA requirements for steel, aluminum, and labor value content. Obviously, the USMCA has imposed many new content requirements, and the agreement that was made involved all kinds of trade-offs. The net effect has certainly been to increase content requirements in North America in many respects. Canada and Mexico also point out that it is not the job of the UNDT Committee to rewrite the text in order to advance a party’s policy objective that is not actually negotiated in the agreed text of the USAMCA.

The panel raised several questions seeking to clarify the general operation of the vehicle’s basic parts and RVC calculations and how they relate to the USMCA script. At the conclusion of the session, the Chair announced that a draft resolution would be prepared by October 12 and that a final decision would be issued by November 10.

The microphone was barely closed at the hearing before the US International Trade Commission announced it had launched an investigation into the economic impact and operation of automobile rules of origin in the USA, with a public hearing in November. 3, just one week before the Dispute Committee issues its final decision on the pending case. It seems certain that political pressure on these issues will continue in full force for the foreseeable future.

Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XII, No. 230

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