Dispute Looming Over USTR’s Interpretation of USMCA Auto Rules

Trade Update • JULY 26, 2021

A year-long disagreement over interpretation of a key provision the United States-Mexico-Canada Agreement’s more stringent auto rules may be headed for a dispute resolution panel after talks in Washington last week between the U.S. and Mexico failed to make any progress on the issue.

“We believe that the rules of origin have not been interpreted the way it was agreed at the moment we signed the agreement,” Mexican Economy Minister Tatiana Clouthier said during a press conference on Friday. While this position is also shared by Canada, she noted that only “part of” the U.S. automotive sector agrees with Mexico that the U.S. is not interpreting the rule as the three countries negotiated it, and said that “more dialogue” was needed.

Clouthier’s remarks followed meetings in Washington last week with U.S. Trade Representative Katherine Tai, lawmakers, and others. Tai made no specific comments about the issue in a short readout of the meeting, but emphasized the Biden administration’s commitment to “the full implementation of the USMCA, including the strong auto rules of origin.”

‘Roll-Up’ Provision Focus of Dispute

The dispute centres on content requirements in the USMCA rules of origin that allow automobiles collectively manufactured in North America to receive duty-free treatment.

By 2025, 75% of a vehicle and certain “core” components such as engines, transmissions, and suspension systems, must be manufactured within the region in order to qualify for duty-free treatment under the USMCA. This is up considerably from 62.5% under the prior North American Free Trade Agreement (though less than the 85% former President Trump had wanted). So-called “principal” parts, which include tires, bumpers, brakes, and airbags, will also face a higher regional content requirement of 70% by 2023.

Since the USMCA went into effect July 1, 2020, the U.S. has interpreted provisions on how regional content should be calculated differently from what Mexico and Canada contend was originally agreed upon by the three countries.

Specifically at issue is a so-called “roll-up” provision that was designed to incentivize increased regional content. According to the interpretation favored by Mexico and Canada, if a part meets the regional content threshold and is incorporated into a larger car component, then 100% of the initial part should count as “originating” for purposes of meeting a second, broader requirement for the entire automobile’s overall regional content.

The USTR and U.S. Customs and Border Protection, however, don’t want to permit this rounding up, maintaining that if the initial part contains any foreign content, then it must be subtracted from the RVC calculation

Click here for a deep dive into the controversy surrounding the USMCA’s “roll-up” provision.

No Quick Solution

According to an unnamed former USTR official who spoke to Inside Trade earlier this year, despite reported discussions suggesting otherwise, there has been no change of interpretation on the matter by the USTR. “I don’t think there’s any real ambiguity in the text. And to the extent there is, it should be resolved consistent with the goal the parties were trying to accomplish in the revised rules, which was to increase regional content and eliminate loopholes. The interpretation that some — and that’s important to emphasize, we’re talking about some but not all — auto companies are now advancing is contrary to that goal,” he said.

According to the former official, the dispute “presents a big test for the Biden administration” in terms of whether they will “stand with auto workers to implement the rules of origin in a way that strengthens North American supply chain resiliency, or will they allow lobbyists to dilute the rules in ways that will allow China and other countries outside the region to free ride off the agreement? If the administration truly intends to pursue a ‘worker centric’ trade policy, the answer is easy.”

Regarding the above-mentioned policy consideration, it’s worth noting that the United Auto Workers supports the Biden administration’s stricter interpretation of the USMCA auto rules.

Canada’s Automotive Parts Manufacturers’ Association and Mexico’s Automotive Industry Association  argue that the U.S. approach to calculating the regional value for passenger vehicles and light trucks under USMCA “would make it materially more difficult for automakers to get to the agreed upon regional value content minimums.”

The groups worry that making the rules too cumbersome could cause automakers to forgo applying for duty-free treatment, thereby rendering the USMCA irrelevant for preferential tariff purposes with respect to one of the largest industrial sectors in North America.

The Mexican government warned that “not abiding by USMCA rules may potentially disrupt the operations of the North America automotive industry,” resulting in “unnecessary burdens” for manufacturers and “reduced competitiveness” for automakers in the region.