Canada, Mexico Dispute US’s Interpretation of Rules of Origin

Hearings in the USCMA dispute panel over automotive rules started on Aug. 2, 2022, and will finish today. The hearings are being held in Washington D.C. after Canada and Mexico requested them in January 2022. Both countries affirm that the US is interpreting the rules of origin in a way that was not agreed to in the free trade agreement. The final ruling of the panel will be announced by the end of 2022.

“Canada is joining Mexico’s request to establish a dispute settlement panel to address the US interpretation of the rules of origin governing the regional value content calculations that must be performed for a vehicle to qualify for [USMCA] duty-free treatment. The interpretation that the US adopted in July 2020 is inconsistent with [USMCA] and the understanding shared by the parties and stakeholders throughout the negotiations,” said Mary Ng, Canada’s Minister of International Trade, Export Promotion, Small Business and Economic Development, in January 2022.

The former North American Free Trade Agreement (NAFTA) established a 62.5 percent Regional Value Content (RVC) for light vehicles and trucks. With the USMCA Free Trade Agreement the RVC increased to 75 percent. Canada and Mexico agree that if an auto part complies with the minimum required RVC, then it can be considered to have a 100 percent of RVC when incorporated to the total sum of the RVC of the vehicle. On the other hand, the US maintains the posture that the RVC of an auto part cannot be rounded up to 100 percent.

The USMCA also included Labor Value Content (LVC) requirements that include a minimum value of production with a wage over US$16 per hour. It also added that 70 percent of steel and aluminum used in vehicles ought to have originated from the region, as reported by IMCO.

“We continue working to benefit our automotive industry and over 6 million families that rely on it,” said Mexico’s Ministry of Economy on Aug. 2, 2022.

The disagreement over automotive rules is not the only current controversy surrounding the USMCA. On Jul. 20, 2022, the US requested hearings to discuss Mexico’s energy policies. Canada joined the request. “We agree with the US that these policies are inconsistent with Mexico’s USMCA obligations,” said Alice Hansen, Spokeswoman for Mary Ng, to Reuters.

Despite the arguments against Mexico’s energy policy from both countries, Marcelo Ebrard, Mexico’s Minister of Foreign Affairs, said that the relationship with the US is not at risk. “The fact that we have a variance with the US regarding one topic does not mean that the bilateral relationship will collapse nor that we will withdraw from the agreement. We do not have any presidential order towards that direction. We will continue with previous dialogues and hearings at their time,” said Ebrard.