Applicability of USMCA Rules of Origin Raise Controversies

The applicability of rules of origin for several goods, particularly automotive parts and vehicles, traded under USMCA continue to raise concerns among the three members. One year after the USMCA and its related protocols entered into force, there are issues yet to be solved regarding the interpretation of the applicability of the rules of origin for automotive goods.

Last week, Bloomberg reported that the US was "clashing" with Mexico and Canada over the rules of origin as automakers and governments keep pressuring US President Joe Biden’s administration. The major dispute focuses on how the percentage calculations should be done.

The Regional Value Content (RVC) rule stablishes a minimal percentage that depends on the type of parts: core parts, principal parts and complementary parts. While light vehicles were granted three years to reach a total of 75 percent in RVC, heavy trucks have seven years. The issue lays in that there are two methods to calculate RVC: the Net Cost Method (NCM) and the Transaction Value Method (TVM). The former takes into account the transaction value of the good, excluding shipment costs, while the latter considers the value of non-originating materials including those of undetermined origin.

For a full analysis on USMCA's rules of origin for automotive goods, do not miss our article USMCA: New Rules for a New Era.

"If a core part uses 75 percent regional content, and thus qualifies under that requirement for duty-free treatment, Mexico and Canada argue that USMCA allows them to round the number up to 100 percent for the purposes of meeting a second, broader requirement for an entire car’s overall regional content. The US, however, does not want to permit rounding up, making it tougher to reach the duty-free threshold for the overall vehicle," states Eric Martin and Keith Laing, analyst for Bloomberg. The stakes are high because this is a US$236 billion decision, which is the value of intraregional exports in the automotive sector, according to the USTR.

The topic was a priority during the visit of Mexico’s Minister of Economy, Tatiana Clouthier, to Washington on July 21. According to a formal press release, she met with US Secretary of Commerce Gina Raimondo, to address "priority topics between Mexico and the US as the relevance to assure resilient value chains, the stationary, sugar and tomatoes suspension agreement, as well as the better use of the USMCA under Biden Administration's infrastructure plan." Clouthier also met with Jennifer Safavian, CEO of Autos Drive America, an association grouping: BMW of North America, Honda North America, Hyundai Motor America, Kia Motors America, Mazda North American Operations, Mercedes-Benz USA, Mitsubishi Motors, Nissan North America, Toyota Motor North America and Volkswagen Group of America. During the latter meeting, Coulthier discussed the negative impact that the interpretation of the USMCA's rules of origin could bring the automotive sector. The meeting also addressed their shared priority to assure resilient supply chains in the region.