USMCA Arbitration Panel Issues Final Report Interpreting North American Automotive Rules of Origin

January 16, 2023
USMCA Arbitration Panel Issues Final Report Interpreting North American Automotive Rules of Origin

On January 11, 2023, the Arbitration Panel established in accordance with article 31 of the Unites States – Mexico – Canada Agreement (“USMCA”) published its final report regarding the enforcement and interpretation of important provisions governing the rules of origin applicable to the automotive industry under the USMCA.

It should be noted that on August 20, 2021, Mexico’s government requested consultations with the government of the United States as to the interpretation and application of Articles 3 (Regional content value for passenger vehicles, light trucks and their parts) in connection with the Appendix to Annex 4-B (Provisions related to the rules of origin by specific product for automotive goods) and 4.5 fourth paragraph (Regional Value Content “RVC”) and the Uniform Regulations of the USMCA. Such request for, consultations was also joined by Canada’s government.

In general terms, the argument of Mexican and Canadian governments is that under the provisions of the USMCA, if a good that contains non-originating materials qualifies as originating under the Agreement, the value of those non-originating materials should not be considered in the calculation of the RVC of the goods into which said materials are incorporated. In other words, if a good is produced in a country that is a Party to the Agreement and said good qualifies as originating, that good will be considered 100% originating when it is used in the production of another good (commonly known as the “roll-up” rule).

However, under the interpretation of the United States government, the calculation of the RVC of a vehicle and the calculation of the RVC of the “essential parts” of a passenger vehicle or light truck must be made separately and independently of each other. In other words, under the U.S. interpretation, even when an essential part qualifies as originating, if it contains non-originating materials, these must be taken into consideration when calculating the RVC of the vehicle. This interpretation is reflected in the letters of approval of the Alternative Staging Regime issued by the United States to producers in the automotive sector.

As per the final report dated December 14, 2022, the Arbitration Panel issued its decision in accordance with the criteria of Mexico’s and Canada’s governments, stating that the “roll-up” rule is applicable to the calculation of the RVC of the vehicle, and that, contrary to the United States government’s position, the USMCA does allow vehicle manufacturers to consider the essential parts of a finished vehicle (engine, transmission, chassis, etc.) as originating as long as said auto parts comply separately with the minimum percentage of regional content (75%), applying the alternative processes established by the USMCA.

In accordance with the above, the United States government must abide by the final report of the Arbitration Panel within a period which may not exceed 45 days after it was notified of the Panel’s decision. In case of non-compliance with the final report, Mexico’s and Canada’s governments may suspend USMCA treaty benefits on imports from the United States in an equivalent amount of the damages sustained, which will apply until a final resolution is reached.

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