Canada Joins Mexican Call for USMCA Panel on Auto Rules of Origin

Trade Update • JANUARY 14, 2021

Canada yesterday announced that it intends to join Mexico in requesting a panel under the United States-Mexico-Canada Agreement to resolve an ongoing dispute over how the U.S. is interpreting USMCA’s rules of origin for automotive vehicles, which the two countries say differs from what had been agreed to when the deal was negotiated.

Last week, Mexico formally requested a panel after consultations launched during the summer failed to reach a resolution. As previously explained here, the dispute centers on contradictory interpretations of methodologies for calculating the regional value content of vehicles in order to qualify for duty-free treatment under the USMCA.

Mexico contends that the agreement includes alternate methodologies for calculating RVC that were negotiated to help the industry meet USMCA’s more stringent origin requirements, but the U.S. Commerce Department is not allowing automakers to benefit from these provisions.

Looking for Certainty

The Government of Mexico says it “believes that the decision of a panel will provide certainty to the automotive industry for the benefit of the competitiveness of the region.”

Canada echoed a similar belief that all three countries would “benefit from certainty” that the deal “is being implemented as negotiated.”

In a statement, International Trade Minister Margy Ng said the interpretation of the rules of origin governing RVC calculations for vehicles (as adopted by the U.S. in July 2020) is “inconsistent” with the USMCA “and the understanding shared by the parties and stakeholders throughout the negotiations.”

The deal’s rules of origin for automotive vehicles, Ng said, “are aimed at encouraging production and sourcing in North America. The outcome was the result of negotiations and close consultations with automotive stakeholders, which ensured that these new rules of origin would deepen regional integration and support the competitiveness of automotive producers in North America.”

U.S. Position

“The overarching goal of the USMCA is to raise standards across the board and we remain confident that the U.S. interpretation of the automotive rules of origin is consistent with the USMCA,” USTR spokesman Adam Hodge said in an unpublished e-mail statement.

According to the USTR, “any interpretation of the automotive rules of origin that reduces the regional value content of a vehicle produced in North America runs counter to the goals of attracting new investment, creating well-paying manufacturing jobs and ensuring USMCA Parties are the ones that benefit from the duty-free treatment for meeting these new rules.”

Why It Matters

Speaking about the dispute, Luz María de la Mora Sánchez, undersecretary for foreign trade in Mexico’s Economy Secretariat said the uncertainty caused by the current U.S. interpretation of the USMCA’s auto rules of origin poses a threat to the North American auto industry as a whole. The real concern, she explained, is that automakers may question whether it’s worth complying with USMCA and choose instead to source from third parties.

De la Mora stressed that flexibility is important as the industry quickly transitions to automation and electric vehicles. It’s “very hard to say,” she said, what production practices will look like in 10 years and whether USMCA’s rules of origin, as they were negotiated, will remain useful.

“So we also need to be flexible about changes in industry. And we need to adapt to the changes in the industry, making sure that industry stays in North America, invests in North America,” she said.