Interpretation of USMCA Auto Parts Rules of Origin Hotly Contested

Over the past few weeks, we have seen Canada, Mexico and the United States present their respective positions and legal arguments, often in very pointed exchanges, on how to interpret rules of origin for auto parts in under the United States-Mexico-Canada Agreement (USMCA). This is an important issue because the assembly operations of vehicles and their “Core Parts” (engine, transmission, etc.) inevitably involve long bills of materials with components from many countries, and what is disputed , that is, if the Core Parts have been found to meet the USMCA requirements to be “originating” then may have their value counted as originating value (that’s to say, “cumulative”) in the calculation of the regional value content (RVC) of the vehicle as a whole.

The USMCA amended NAFTA to impose a series of new requirements in the automotive sector, including the following:

  • The main parts specified must be original seen separately from the vehicle as a whole

  • There must be a sufficient level of steel of North American origin

  • There must be a sufficient level of North American-sourced aluminum

  • There must be a sufficient level of labor value at wages of $16 per hour or more

The crux of the matter in the current dispute is whether a producer, after applying the major parts rules and determining that its major parts are originating, can then treat them as originating in calculating the vehicle’s RVC. In particular, Section 3 of the Automotive Appendix to Chapter 4 of the USMCA sets out in paragraphs 7, 8 and 9 four other methods that a producer may use to determine whether its center parts are originating. The United States contends that these four alternatives are available to satisfy the requirement that essential parts be originating, but that when calculating the RVC of a vehicle, only the first of the four alternatives (listed in paragraph 8.a) can be used.

Canada and Mexico point out that paragraph 9 of Article 3 of the Automobile Appendix explicitly states that if the RVCs of the essential parts (which are listed in Table A.2 of the Automobile Appendix) meet the required threshold in under one of the alternatives “then each Party shall provide that all parts in Table A.2 of this Appendix are original and that the passenger car or light truck shall be deemed to have met the requirement of paragraph 7.” They note that this provision makes it clear that central portions not only meet the requirement of paragraph 7, but are also “originating,” a term that has a unique definition in the USMCA. They also point out that nothing in the USMCA text suggests that the meaning of “originating” changes from one part of the USMCA to another. Once deemed “stock”, a main part or a super core should, according to them, contribute to the RVC of the vehicle like any other “stock” component of the vehicle.

The US response essentially consists of two arguments:

  1. The structure of Article 3 of the Automotive Appendix and the accompanying tables suggest that the test to determine whether essential parts are originating should be considered separate from the way in which the calculation of the vehicle’s RVC is carried out. . Canada and Mexico respond to this argument by essentially saying “distinct or not, the USMCA says in paragraph 9 that central parts that meet the test not only meet the requirement of paragraph 7 but are also ‘originating’, and there is no qualification in paragraph 9 or elsewhere that limits them to originating for one purpose and not others.Essential parts that pass the test are simply “originating”, with all that that normally entails. It seems fair for Canada and Mexico to ask the following question: if the United States did not intend that an essential part found to meet the criteria of paragraphs 7 to 9 would also be “originating” for the RVC vehicle, so why did they accept the text in paragraph 9 which explicitly states “that all parts listed in Table A.2 of this appendix are originating” when they meet one of the other criteria? interpretation of the United States, it appears that the words “that all parts of Table A.2 of this Annex originate” would become redundant, violating the canon of statutory interpretation that, in determining the ordinary meaning of In a law, treaty or regulation, effect should be given to all the words of the text if possible.

  2. The United States also argues that, if Canada and Mexico’s interpretation were adopted, the net effect of the USMCA’s automotive rules of origin would be to leave a loophole that would require far less North American content than otherwise, which was not the intention of the parties. Canada and Mexico, however, report various ways in which the higher CVR under the USMCA (75% versus 62.5% under NAFTA) still has a significant impact on auto qualification and automotive parts and also comes with new USMCA requirements for steel. , aluminum and labor value content. It’s clear that the USMCA imposed many new content requirements, and the deal that was struck included all sorts of compromises. The net effect has certainly been to increase North American content requirements in many ways. Canada and Mexico also note that it is not the role of the Disputes Panel to rewrite text to promote a party’s policy objective that was not actually negotiated in the agreed USMCA text. .

The Panel posed numerous questions aimed at clarifying the overall operation of the critical parts and vehicle RVC calculations and their relationship to the USMCA text. At the end of the hearing, the President announced that a draft decision will be prepared by October 12 and a final decision will be issued by November 10.

The microphone had barely been turned off during the hearing when the United States International Trade Commission announced that it was launching an investigation into the economic impact and operation of automotive rules of origin in the USMCA, with a public hearing scheduled for November. 3, just a week before the Disputes Tribunal issues its final decision in the pending case. The political pressure around these issues seems sure to continue in full for the foreseeable future.

Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XII, Number 230

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