SHARE

October 15, 2021

Revving Up - Dispute Over USMCA Auto Parts Rules

You've Reached Your
Free Article Limit This Month
Register for free to get unlimited access to all Law.com OnPractice content.
Register Now

On Aug. 20, Mexico requested consultations with the United States on the interpretation of the automotive rules of origin under the US-Mexico-Canada (USMCA) trade agreement. A week later, Canada joined Mexico in the consultation request.  The outcome may impact how car parts are produced in North America for years to come.

Mexico's request for consultations concerns the calculation of the Regional Value Content (RVC) for purposes of vehicles' origination under USMCA.

What the USMCA Currently Provides

The Appendix to the USMCA Annex 4-B provides that a passenger vehicle or light truck is originating in North America only if the parts under Column 1 in the below table are originating.

   
Parts (column 1) Components (column 2)
Engine Heads, Blocks, Crankshafts, Crankcases, Pistons, Rods, Head subassembly
Transmission Transmission cases, Torque converters, Torque converter housing, Gears and gear blanks, Clutches, Valve body assembly
Body and Chassis Major body panels, Secondary panels, Structural panels, Frames
Axle Axle shafts, Axle housing, Axle hubs, Carriers, Differentials
Suspension System Shock absorbers, Struts, Control arms Sway bars, Knuckles, Coil springs, Leaf springs
Steering System Steering columns, Steering gears/racks, Control units
Advanced Battery Cells, Modules/arrays, Assembled packs

 

A part under Column 1 will be originating only if it meets the RVC requirement shown below (except for advanced batteries) by using the net cost method (NCM) or the transaction value method (TVM).

The NCM is calculated by subtracting the value of non-originating materials (including materials of undetermined origin used in the production of the good) from the net cost of the good and dividing the result by the net cost of the good.

The TVM is calculated by subtracting the value of non-originating materials (including materials of undetermined origin used in the production of the good) from the transaction value of the good (excluding any costs incurred in the international shipment of the good) and dividing the result by that transaction value of the good.

Effective Date Using the NCM Using the TVM
July 1, 2020 66% 76%
July 1, 2021 69% 79%
July 1, 2022 72% 82%
July 1, 2023 75% 85%

 

To calculate the RVC for a part listed in Column 1, the vehicle producer has two options to determine the value of the non-originating materials (VNM):

  • Calculate the value of all non-originating materials used in the production of the part; or
  • Calculate the value of any non-originating components used in the production of the part that are listed under Column 2.

The USMCA also provides alternative methodologies to calculate the RVC for all parts under Column 1 as a "single part" using the sum of the net cost of each part listed in that column.

Under the alternative methodologies, if the RVC calculated meets the threshold under Table 2 above, all parts shall be considered originating and the passenger vehicle or light truck will also be regarded as originating.

The Dispute

Mexico's position is that once parts under Column 1 meet the required thresholds, those parts are originating regardless of the non-originating materials contained in those parts. In other words, the non-originating materials in the parts under Column 1 roll up into the value of the originating material.

The United States, however, favors an interpretation that would subtract any non-originating materials from the RVC.

Canada has expressed concerns with the interpretation of the United States and has joined Mexico in the request for consultations.

What to Expect

Mexico requested consultations with the United States under the USMCA dispute settlement mechanism. The USMCA Parties must hold consultations no later than 30 days after the delivery of the request.

If disagreement remains, a Panel (comprised of five members) will settle the dispute. Canada could join as a complaining party.

The Panel must issue its final report no later than 180 days after the appointment of the last panelist. Thus, a final decision on the valid interpretation of the rules of origin could be expected by summer next year.

A final resolution to the disagreement between the USMCA Parties is of paramount importance for the auto industry in North America, as the RVC for vehicles reaches its highest threshold to 75% in 2023.

If you have any questions about these developments, please contact Mark Ludwikowski ([email protected]; 202-640-6680); Kevin Williams ([email protected]; 312-985-5907); Aristeo Lopez [email protected] Dennis Devaney ([email protected]); or another member of Clark Hill's International Trade Business Unit.

ALM expressly disclaims any express or implied warranty regarding the OnPractice Content, including any implied warranty that the OnPractice Content is accurate, has been corrected or is otherwise free from errors.

More From Clark Hill, PLC

What the California Environmental Quality Act Means for Cannabis Operators in the Golden State

By Steven L. Hoch Clark Hill, PLC March 22 , 2022

Cannabis is big business in California.

EPA Proposes Updates to the Hazardous Air Pollutant Copper Smelting Rules

By Danielle M. Hazeltine Clark Hill, PLC March 22 , 2022

On Jan. 11, EPA proposed more stringent National Emissions Standards for Hazardous Air Pollutants (NESHAPs) that apply to both major and area source primary copper smelters.

Investing in State Law Compliant Cannabis Businesses: Part 2 - Diving Deeper

By Sander C. Zagzebski Clark Hill, PLC March 21 , 2022

In Part 1 of this two-part series, we addressed the high-level concerns that a new investor should consider in making an investment in a state legal cannabis company. In this follow up, we address some of the more nuanced issues that investors should consider before deciding to invest in a specific cannabis company.

More From Transportation

5 Trends to Watch in 2023 International Arbitration

By Joseph J. Mamounas Greenberg Traurig January 19 , 2023

To meet demand for more flexible and timely ways to achieve dispute resolution, some clients are turning to emergency arbitration procedures as ways to not only preserve the status quo but also obtain an early assessment of the merits (through the lens of the likelihood of success).

Improving Liquidity Through Real Estate Sale and Leaseback Transactions

By Simone Wijngaard Greenberg Traurig December 21 , 2022

Many companies own the real estate from which they operate their business.

Featured Stories
Closeclose
Search
Menu

Working...