AUTOMOTIVE RULES OF ORIGIN DISPUTE USMCA’s Panel Report
In August 2021, Mexico and Canada initiated a dispute pursuant to Article 31.4. of the USMCA against the United States of America (“USA”). The dispute concerned the methodologies used in determining whether a vehicle qualifies for preferential trade treatment under the USMCA. Specifically, Canada and Mexico disagreed with the USA’s interpretation of the rules on whether the core parts for vehicles are eligible to benefit from the “roll-up” methodology when determining the regional value content of vehicles. The case is known as the “United States – Automotive Rules of Origin,” and the USMCA Dispute Resolution Panel issued its final report on the matter on December 14, 2022. The final report was published and made public on Wednesday, January 11, 2023, resolving in favor of Mexico and Canada. In this article, we share key aspects concerning the dispute and report.
Notably, this dispute was resolved very quickly. Mexico initially requested consultations on August 20, 2021, and the Dispute Resolution Panel (the “Panel”) was established on March 22, 2022, when the parties (including Canada) agreed on the panelists. Considering the date that the panel was established and the date the final report was issued, the dispute took only 268 days (or 8 months, 23 days) to resolve. Below, we share some key dates in the dispute:
Chapter 4 of the USMCA provides that for a vehicle, passenger vehicle or truck to receive preferential tariff treatment, such good must meet, among other requirements, a certain Regional Value Content (“RVC”). Article 4.5 of the USMCA proscribes the methods that producers may use to determine the RVC of a good.
Article 4.5.4 of the USMCA, known as the “roll-up” provision, was at the center of the dispute between the parties in this case. The roll-up provision establishes that the value of non-originating materials used in the production of a subsequent good shall not be included for the purposes of calculating the subsequent good’s RVC. In other words, if a good qualifies as originating per USMCA’s Rule of Origin, the producer does not need to determine the percentage of non-originating materials because such good is considered 100% originating when it is used in the production of another subsequent good. However, the parties to the dispute disagreed on their interpretations of this roll-up provision and its applicability to automotive goods.
Under the USMCA, automotive goods are subject to several special provisions. First, the Autos Appendix of Chapter 4 establishes additional criteria that must be met for automotive goods to receive preferential trade treatment, including requirements regarding the use of steel and aluminum as well as labor and wage requirements.
Moreover, Article 8 of the Autos Appendix requires the USMCA Parties to allow Alternative Staging Regimes (“ASRs”). An ASR allows an auto-producer to import passenger vehicles or light trucks under a different set of RVC requirements than the general terms set forth in the USMCA’s Auto Appendix. The ASR has the feature that an auto-producer may request approval of an ASR for no more than 10% of its total production of passenger vehicles or light trucks in the territories of the USMCA parties.
Article 8.1 requires the USMCA parties to grant the use of an ASR to passenger vehicles or light trucks producers for a period ending no later than January 1, 2025, or five years after USMCA’s entry into force.
The dispute began as a result of a different interpretations by the United States, on the one hand, and Mexico and Canada, on the other hand, concerning the rules of origin for vehicles and light trucks set forth in Article 4.5 of the USMCA and Article 3 of the Autos Appendix. Specifically, the RVC calculation method for a vehicle’s core parts and finished vehicles was at issue.
The Different Interpretation of the Rules of Origin for Autos
Mexico and Canada
Mexico and Canada interpreted Article 4.5 to allow auto producers to determine the RVC in accordance with the methodology of articles 3.7 to 3.9 of the Autos Appendix. That is, if according to the RVC methodologies, the producer determines that a vehicle “core part” is originating, then the auto part is considered to have a 100% RVC when calculating the vehicle’s total RVC. In other words, the USMCA provides a single unified methodology for the RVC calculation of core (and super-core) parts and finished vehicles.
United States
The United States submitted that originating core parts should not be treated as having a 100% RVC when calculating the RVC of the finished vehicle. The United States instead argued that Article 3 of the Autos Appendix establishes two distinct requirements that a vehicle must meet: (1) the “origination requirement” of the core parts and (2) the general RVC requirement of the finished vehicle. Thus, unlike in Mexico and Canada’s interpretations, the USA did not apply the roll-up principle when calculating the RVC of finished passenger vehicles and light trucks.
The Panel’s Analysis
The Panel established that Article 3.7 of the Autos Appendix is silent on whether the results of the core parts’ RVC calculations can be used in calculating the RVC of a finished vehicle.
Nonetheless, the Panel stated that this silence must be considered in light of the roll-up provision in Article 4.5.4. As noted above, Article 4.5.4 of the USMCA establishes that the value of non-originating materials of an originating good, which is used in the production of a subsequent good, shall not be included for the purposes of calculating the good’s RVC.
According to the Panel, Article 4.5.4 does not need to be repeated in Article 3 of the Autos Appendix to be applicable to said goods (i.e., passenger vehicles or light trucks). Furthermore, Articles 3.7 through 3.9 of the Autos Appendix do not include any carve-out or exception regarding the roll-up provision applicable to the core parts or super-core. Therefore, the Panel had to conclude that core parts, whether indicated in the terms used in Table A.1 or Table A.2, are included in the final vehicle.
The Panel agreed with Mexico and Canada’s interpretation that when core parts (or super-core) are originating, they are eligible to benefit from the roll-up opportunity when determining the RVC of the vehicle.
Conclusion
Regarding the RVC calculation, the Panel concluded that the USMCA does not include a separate, self-standing “origination requirement” for core parts. Therefore, originating core parts (or super-core parts) per the RVC methodologies established in the Autos Appendix can be included as originating material in the RVC calculation of the finished vehicle. As a result, this decision may have serious implications for the auto-industry and future applications of the roll-up provision. One could argue now that the roll-up provision not only applies to core parts, but also to principal parts and complementary auto-parts.
The Claim
Mexico and Canada also raised a claim concerning Article 8 of USMCA’s Appendix to Annex 4-B (“Autos Appendix”). Mexico and Canada argued that the United States established requirements for producers to access its ASRs that were beyond this provision. In response, the United States claimed that its ASRs were consistent with its USMCA obligations. The issue before the Panel was whether the United States established requirements that went beyond the Autos Appendix in relation to its ASR approval letters and whether the United States violated the USMCA in doing so.
What is an ASR?
An ASR is a special regime that allows producers of passenger vehicles and light trucks to benefit from USMCA tariff preferences, even if their products cannot fully comply with the regular rules of origin. Given the high RVC standard established for the automotive sector, the USMCA Parties agreed to temporarily allow the establishment of ASRs that include rules of origin that are generally less strict than USMCA’s regular auto-rules of origin regime. Article 8.2 of Autos Appendix establishes rules concerning the RVC of vehicles, the RVC of auto-parts, the amount of steel and aluminum of vehicles, and the Labor Value Content (LVC) of vehicles in relation to ASRs.
Panel analysis on the USA’s ASR Approval Letters
The Panel noted that the United States conditioned its ASR approval letters on ensuring that all vehicles and trucks imported into the USA must meet the requirements of Article 3.7 of the Autos Appendix, that is that core parts must meet general rules of origin to qualify as originating. This was not provided in article 8.2 of the Auto Appendix. In other words, the United States required passenger vehicle and light truck producers to meet requirements other than those of Article 8.2 of the Autos Appendix to access its ASR. Accordingly, the Panel found that the United States did establish requirements beyond the USMCA.
Conclusion
The Panel interpreted that Article 8.2 of the Autos Appendix is an exhaustive list of rules of origin for passenger vehicles and light trucks regarding ASRs. As a result, the Panel found that USMCA Parties are prevented from establishing requirements beyond this provision with regard to their ASRs.
The Panel concluded that the United States failed to comply with its USMCA obligations because it established ASR requirements for passenger vehicles and light trucks that were beyond those established in Article 8 of the Autos Appendix.
Luz Maria de la Mora, former Undersecretary for Foreign Trade in Mexico, said that the results of the panel’s report will favor the competitiveness of the region. Meanwhile, USTR Spokesperson, Adam Hodge, has described the Panel’s interpretation of the USMCA as “disappointing,” and stated that it could “result in less North American content in automobiles.”
Pursuant to Article 31.18 USMCA, Mexico, Canada, and the United States had 45 days (until the first weeks of February 2023) to reach a resolution that settles the dispute in a satisfactory manner for all. However, news on a formal resolution is still yet to be seen. A resolution could contain any of the following:
If the USMCA parties fail to agree on a resolution, Mexico and Canada may suspend benefits in the automobile sector to the United States under Article 31.19 of the USMCA. But, if it is not practicable or effective to suspend benefits regarding autos, Mexico and Canada may suspend benefits in other sectors, which may occur after a review of the Panel as described below.
An implementation panel may be activated in the event of disagreement with the measures adopted to comply with the report. This procedure is governed by article 31.19 USMCA, whereby a panel could address, for instance, whether the USA’s measures comply with the USMCA or whether any suspension actions are excessive. This procedure is similar to WTO compliance panel procedures per article 21.5 of the Dispute Settlement Understanding.
It is also worth noting that the dispute over automotive rules of origin is not the only disagreement to be addressed by a USMCA panel. For example, the USA recently stated that is seeking a second dispute settlement panel to address Canada’s dairy import quotas which the USA claims do not comply with USMCA. A USMCA panel previously sided in favor of the USA on this issue in December 2021. Following that ruling, Canada made some amendments to its tariff-rate quota (TRQ) measures, however the USA continues to challenge Canada’s measures as failing to comply with its USMCA obligations.
