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Overview
In a report circulated on January 11, 2023, a dispute resolution
panel established under the Canada-United States-Mexico Agreement
(“CUSMA“) sided with Mexico and Canada
against the United States in respect of automotive rules of origin.
The panel found that the US requirements for calculating regional
value content (“RVC“) for passenger
vehicles and light trucks are in breach of CUSMA’s rules of
origin.1 In siding with Mexico and Canada (and a
significant portion of the automotive industry), the panel
confirmed that CUSMA allows vehicle manufacturers to
“roll-up” the cost of originating core parts. The US is
expected to bring itself into compliance with the panel’s
ruling, thereby allowing for freer trade in the North American
automotive market. Absent such compliance, Mexico and Canada would
be legally entitled to retaliate against the US by imposing duties
or otherwise taking measures of equivalent effect.
This is the third panel decision to be issued under Chapter 31
of CUSMA. For an overview of other disputes, see McMillan’s
CUSMA Dispute Settlement Scoreboard here.
The Law: CUSMA’s Rules of Origin and Roll-up
CUSMA contains complex “rules of origin” for
determining whether a vehicle originates in a CUSMA Party, thereby
entitling it to preferential tariff treatment. Under those rules,
72% of the value of finished passenger vehicles and light trucks
must originate in a CUSMA Party.2 CUSMA also requires
72% of the value of core parts to originate in a CUSMA
Party,3 but permits the use of more flexible methods for
calculating the RVC of core parts than it does for calculating the
RVC of the finished vehicle. The RVC requirements for both finished
vehicles and core parts will increase to 75% on July 1, 2023.
Roll-up occurs when a producer considers 100% of the value of an
input as originating in a CUSMA party, even if that input is
comprised of some non-originating material. Consider a car engine.
If that engine is made from 85% North American components, it
qualifies as an originating “core part” under CUSMA. When
that engine is incorporated into a finished vehicle, the roll-up
method would consider 100% of its value to be North American, not
just 85%. In the words of the panel, the producer disregards the
value of the non-originating inputs in the finished vehicle RVC
calculation.4
The Dispute: the US’ Requirement not to Roll-up for
Approval of ASRs
The present dispute arose as a challenge to the US policy of
effectively precluding automotive producers from applying the
roll-up technique for core parts, making it more difficult for them
to qualify for preferential tariff treatment. The US implemented
this policy through certain importation agreements – termed
Alternative Staging Regimes (“ASRs“)
– that allow producers to import passenger vehicles or light
trucks under a different set of requirements than those contained
in CUSMA.5 The US informed producers it would approve
ASRs on condition that they not use the more flexible methods for
calculating the RVC of core parts and then roll up the entire value
of those core parts in the finished vehicle RVC calculation. Mexico
and Canada argued that such a condition was inconsistent with
CUSMA’s roll-up provision, namely Article 4.5.4.
The Decision: Let Them Roll
The panel held in favour of Mexico and Canada, clarifying that
the entire value of originating core parts could be rolled-up in
the vehicle RVC calculation. This was because, in the panel’s
view, the term “originating” should be interpreted
consistently throughout CUSMA: once a core part is
“originating”, even under the more flexible methodologies
for calculating RVC, it is then “originating” for the
finished vehicle RVC calculation.6 Not only was this
consistent with principles of treaty interpretation, it was also
the position of US negotiators, as evidenced by communications they
exchanged with Canada during CUSMA’s
negotiation.7
Now that the panel has issued its decision, the US, Mexico and
Canada have 45 days to reach a resolution, and for the US to bring
itself into conformity with CUSMA, meaning the US would have to
cease denying ASRs on the basis that a producer used the roll-up
method to calculate RVC for core parts. Alternatively, if the US
does not bring itself into conformity, Canada and Mexico could
legally retaliate against the US, and could target its automotive
sector.
Should the US eliminate its non-conforming measure, it would
mean more vehicles produced in Canada and Mexico would qualify for
duty-free access under CUSMA. In short, freer trade and greater
access to the American market for vehicles assembled in Canada and
Mexico. On the other hand, and taking the view of the US, the
decision could mean less North American content ultimately ends up
in vehicles traded between the parties.
The decision is a welcome one for Canada and Mexico’s
automotive industries, which have faced challenges stemming from
the effects of COVID-19 and supply chain breakdowns, including
factory shutdowns and semiconductors chip shortages. The
panel’s reasoning also provides a degree of clarity on the
legal interpretation of CUSMA that could be persuasive to future
panels: the term “originating” has a consistent meaning
throughout CUSMA unless otherwise modified by its text.
Footnotes
1. United States – Automotive Rules of
Origin (USA-MEX-CDA-2022-31-01), Final Report, December 14,
2022 (“Decision“).
2. The parties raised this from 62.5% under NAFTA. For
more on the changes in CUSMA see our previous commentary here and here.
3. Core parts are listed in Table A.1 of the Autos
Appendix to Chapter 4 and include the engine, transmission, body
and chassis, axle, suspension system, steering system and advanced
battery. CUSMA also establishes the categories of principal parts
and composite parts, which have their own RVC
requirements.
4. Decision, para. 51.
5. ASRs are transitional instruments required under
CUSMA. They can be used until July 1, 2025.
6. Decision, para. 149.
7. Decision, paras. 190-192.
The foregoing provides only an overview and does not
constitute legal advice. Readers are cautioned against making any
decisions based on this material alone. Rather, specific legal
advice should be obtained.
© McMillan LLP 2021
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