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Panel Ruling: Automotive Rules of Origin Dispute

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Businesses in the automotive sector will be interested in the recent conclusion to the automotive trade dispute between Canada, the US, and Mexico (the “USMCA Parties”).

The USMCA Parties had different interpretations of the automotive rules in the Canada-United States-Mexico trade Agreement (the “USMCA”), which required a USMCA Panel to be formed to review the different interpretations and settle the dispute.

The Panel publicly released its final decision on January 11, 2023 (the “Decision”).

This decision is important because it makes it easier for automotive producers to receive preferential tariff treatment under the USMCA, which will help the USMCA Parties save costs when importing and exporting vehicles between the USMCA Parties.

 

Background

The USMCA came into force on July 1, 2020, replacing the NAFTA, and continues to give preferential tariff treatment to goods “originating” in Canada, the US, or Mexico. For some goods to be considered originating, they must be manufactured with a minimum percentage of “inputs” from the three USMCA Parties (while somewhat of a simplification on our part, this is referred to as “Regional Value Content” or “RVC”).

Like the NAFTA, the USMCA has very specific rules for automotive goods, and these rules are some of the most complex in the agreement.   Under these rules, and we are again simplifying, USMCA originating vehicles must meet a minimum RVC for each of their parts, and for the vehicle as a whole.

The USMCA also has what is called a “roll-up” provision which applies when an “originating” good is used as an input into a second good. With the “roll-up” rules, originating goods are always considered 100% originating when calculating the RVC for the second good – regardless of the real percentage (see para 51 of the Decision).

The Ruling / Panel Decision

The Dispute between the USMCA Parties, and the matter before the Panel, involved how to treat “Core Parts” used as inputs to manufacture vehicles (see paras 137-139 of the Decision). From Mexico and Canada’s perspective, the “roll-up” rules applied to Core Parts to calculate the RVC of the full vehicle. The US took the contrary view that the roll-up rule did not apply to Core Parts.

The Panel’s ultimate decision on this point, provided to the USMCA Parties on December 14, 2022, and released publicly last week, was that the roll-up rule applies to Core Parts, concluding that the US position denying a roll-up for Core Parts was essentially imposing stricter origin requirements on auto producers than was required by the plain words of the USMCA (see paras 203–209 of the Decision). As the Panel noted, the USMCA does not presently have any language that excludes Core Parts from the roll-up rules: see paras 141-150!

Commentary

This is mixed news for the automotive industry, since the Decision will be viewed through different lenses.

The effect of the Decision – liberalization of free trade within the USMCA countries – seems consistent with the aim of the USMCA itself.

On the other hand, since the Decision seems to allow automotive producers to include fewer North American produced parts in USMCA qualifying vehicles, but still receive preferential tariff treatment for their vehicles, one can completely understand why US producers (like the big three automotive manufacturers) may well disagree!

Businesses engaged in the automotive sector should how this Decision impacts them and re-think their origin analysis by vehicle class.

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