Canada and Mexico Seek Panel Proceedings in USMCA Dispute with United States Concerning Automotive Rules of Origin

On January 6, 2022, the Government of Mexico requested the establishment of a panel in its dispute with the United States concerning the "interpretation and application" of the rules of origin (ROO) for automotive goods under the United States-Mexico-Canada Agreement (USMCA). Mexico's request alleges that the United States is interpreting and applying the USMCA's automotive rules of origin in a manner inconsistent with Chapters 4 and 5 of the Agreement, as well as the Uniform Regulations adopted by the USMCA Parties. Mexico is requesting panel proceedings because its recent consultations with the United States on this issue "did not solve the dispute." On January 13, Canada announced that it is joining the dispute as a complaining Party.

In the coming months, an independent panel will convene to determine whether the United States is acting in a manner inconsistent with its USMCA obligations, as Canada and Mexico have alleged. The outcome of this dispute will have important implications for automotive supply chains and for North American trade relations more broadly, given the potential for retaliatory actions that extend beyond the automotive sector. This alert provides an overview of the dispute, Mexico's panel request, and the next steps in the dispute settlement process.

Background

On August 20, 2021, Mexico requested consultations with the United States pursuant to Article 31.4 of the USMCA, alleging that the United States was "imposing specific requirements on motor vehicle manufacturers that are inconsistent with USMCA [rules of origin] and the Uniform Regulations agreed between the parties."¹ On August 26, 2021, the Government of Canada notified the other USMCA Parties that it had a "substantial interest" in the matter and intended to participate in the consultations, pursuant to Article 31.4.4.²

In its request for consultations, Mexico claimed that the USMCA's automotive ROO permit the use of "roll-up" methodologies, which allow materials (e.g., automotive parts) that have acquired origin by meeting a regional value content (RVC) threshold to be considered fully originating when used as inputs in a subsequent manufactured product (e.g., a finished vehicle). Roll-up methodologies provide additional flexibility for producers of finished goods to satisfy the applicable ROO and therefore obtain preferential tariff treatment. By contrast, the United States has taken the position that the USMCA does not permit the use of roll-up methodologies with respect to certain "core" parts incorporated into finished vehicles – a position consistent with the United States' objective to limit the use of foreign content in the North American automotive supply chain. For a detailed overview of the relevant USMCA provisions and Mexico's request for consultations, please refer to the W&C US Trade Alert dated August 24, 2021.

Mexico and the United States held consultations on this issue on September 24, 2021. Canada participated in the consultations. Mexico's panel request states that the consultations "did not solve the dispute." According to a public statement from Mexico's Secretary of Economy, Ms. Tatiana Clouthier, US officials indicated during the consultations that they had "no political space" to negotiate a change in the United States' position, and were unwilling to discuss the details of Mexico's complaint.

Mexico's Panel Request

Legal basis for the complaint

Mexico's panel request alleges that the United States has adopted an "incorrect interpretation" of certain USMCA rules of origin. According to Mexico, the United States "considers that the value of the non-originating components or parts used in the production of a passenger vehicle or light truck include, for the purposes of calculating the general RVC of the vehicle or light truck, the value of the non-originating materials used to produce an originating 'core part' and/or the 'super core part' that is subsequently used in the production of a passenger vehicle or light truck[.]" Mexico contends that this interpretation is inconsistent with Paragraph 4 of Article 4.5 (Regional Value Content) of the USMCA, and that US actions based on this interpretation are inconsistent with other USMCA provisions. For example, the request alleges that the United States has acted inconsistently with the following:

• Article 4.2(b) (Originating Goods), because the United States does not provide that vehicles and parts "that satisfy all applicable requirements of Annex 4-B (Product-Specific Rules of Origin)" are originating;
• Paragraphs 1 and 2 of Article 4.11 (Accumulation), because the United States denies originating status to vehicles that satisfy the requirements of Article 4.2 (Originating Goods) and all other applicable requirements of Chapter 4 (Rules of Origin), and also disqualifies from originating status a "core part" and/or the "super core part" that has satisfied the RVC requirements using the calculation methodologies provided in the USMCA, when used as a material in the production of a passenger vehicle or light truck;
• Paragraphs 7, 8 and 9 of Article 3 (Regional Value Content for Passenger Vehicles, Light Trucks, and Parts Thereof) of the Appendix to Annex 4-B, because the United States fails to treat the "core parts" satisfying the applicable RVC requirement as originating, for the purposes of calculating the RVC for a passenger vehicle or light truck;
• Paragraph 6 of Article 5.16 (Uniform Regulations), because the United States "does not apply the principle of roll-up to originating 'core parts' provided for in Section 14 of the Uniform Regulations when calculating the RVC of passenger vehicles and light trucks;" and
• Paragraphs 1, 2 and 3 of Article 8 (Transitions) of the Appendix to Annex 4-B and sections 19(2) and 19(4) of the Uniform Regulations, because the United States "has conditioned the approval of an alternative staging regime, and thus the originating status of the vehicles subject to that regime, on the application of the United States' incorrect interpretation" of the automotive ROO.

In contrast to the United States' view, Mexico "considers that any calculation methodology applicable to 'core parts' set forth in paragraphs 8 and 9 of Article 3. . .of the Appendix to Annex 4-B of the USMCA can be used to establish the originating status of a 'core part' for purposes of calculating the general RVC of a passenger vehicle or light truck."

US measures at issue

Mexico's request claims that the United States' "incorrect interpretation" of the auto ROO "is currently reflected in various [alternative staging regime] approval letters issued by the United States to producers in the automotive sector." The USMCA's alternative staging regime (ASR) allows certain vehicles to qualify as originating based on less stringent ROO than would otherwise apply during the five-year period following the Agreement's entry into force.³ The quantity of passenger vehicles or light trucks eligible for the ASR is generally limited to 10 percent of a vehicle producer's annual production in the USMCA territory, though the quantity of eligible vehicles can be increased if a producer provides "a detailed and credible plan" for the vehicles to satisfy all of the automotive ROO within five years of the Agreement's entry into force.⁴

According to Mexico, "[t]he wording commonly used" in ASR approval letters issued by the United States to vehicle producers includes the following stipulation:

"[Y]our plan is approved based on USTR's understanding that [the automaker] will calculate its RVC in a manner consistent with the text of the Agreement, the Uniform Regulations, and direction from USTR and U.S. Customs and Border Protection whereby the calculation for a vehicle's RVC and the calculation for the core parts requirement. . .are calculated separately and independently of one another. More specifically, this means that your plan is approved provided that your vehicle RVC calculation for all vehicles (not just those covered by your alternative staging request) does not count otherwise non-originating components and parts as originating for purposes of the vehicle RVC calculation simply because the same part or component was used as part of the calculation to meet the core parts requirement."

In Mexico's view, this wording "requires producers who seek preferential tariff treatment to adjust their production process. . .to satisfy the unilateral — and incorrect — interpretation of the United States[.]" Additionally, Mexico "understands that the United States' interpretation, as reflected in the ASR approval letters in force, would also be applicable to any future or subsequent application of the USMCA rules of origin for automotive goods." This includes, but is not limited to, "any future letters with regard to ASR plans, future guidance to all automakers regarding the incorrect interpretation, determinations of future origin verifications applying the incorrect interpretation, or any other related, future or subsequent measures that implements the incorrect interpretation."

Next steps

On January 13, the Government of Canada announced that it is joining the dispute as a complaining Party pursuant to Article 31.6.5 of the Agreement.⁵ In its announcement, Canada indicated that it shares Mexico's view that "[t]he interpretation that the United States adopted in July 2020 is inconsistent with [the USMCA] and the understanding shared by the parties and stakeholders throughout the negotiations." In accordance with Chapter 31 of the USMCA, an independent panel will soon convene to determine whether the United States is acting in a manner inconsistent with its USMCA obligations. The next steps in the dispute settlement process are (1) composition of the panel (to be completed no later than 40 days after the panel request);⁶ (2) circulation of an initial panel report no later than 180 days after the appointment of the last panelist;⁷ and (3) circulation of a final panel report within 30 days after the initial panel report.⁸ The panel therefore is expected to issue its final report by September of 2022.

USMCA panel reports must contain (1) "findings of fact;" (2) determinations as to whether the measure at issue is inconsistent with obligations in the Agreement, or a Party has otherwise failed to carry out its obligations in the Agreement; and (3) recommendations, if the disputing Parties have jointly requested them, for the resolution of the dispute.⁹ If the panel in this dispute finds that a US measure is inconsistent with the United States' USMCA obligations, or that the United States has otherwise failed to carry out its obligations under the Agreement, the disputing Parties "shall endeavor to agree on the resolution of the dispute."¹⁰ If the disputing Parties are unable to agree on a resolution within the 45-day period, the complaining Parties (Canada and Mexico) would be permitted to suspend the application to the United States of benefits "of equivalent effect to the non-conformity" until the disputing Parties agree on a resolution.¹¹

The outcome of this dispute will have important implications for automotive supply chains, though these are likely to vary significantly depending on the individual circumstances of specific producers and suppliers. Importantly, the USMCA's Rules of Procedure allow a panel to consider written views submitted by non-governmental entities during the course of the dispute, in addition to hearing the views of the disputing Party governments.¹² Producers and suppliers throughout the automotive supply chain should examine the implications of the Parties' competing interpretations of the USMCA and consider strategies to protect their commercial interests.

_{1 Letter from Secretary Tatiana Clouthier Carrillo to US Trade Representative Katherine Tai, August 20, 2021.
2 Letter from Steve Verheul, Assistant Deputy Minister, Trade Policy and Negotiations, Government of Canada, August 26, 2021.
3 Art. 8 (Transitions) of the Appendix to Annex 4-B of the USMCA ("Automotive Appendix").
4 Automotive Appendix Art. 8.3.
5 Statement by Trade Minister Mary Ng on the implementation of rules of origin for automotive goods under the Canada-United States-Mexico Agreement, January 13, 2022.
6 USMCA Art. 31.9.
7 USMCA Art. 31.17(1)-(2). This deadline may be altered if the disputing Parties agree.
8 USMCA Art. 31.17.5. This deadline may be altered if the disputing Parties agree.
9 USMCA Art. 31.13.1.
10 USMCA Art. 31.18.
11 USMCA Art. 31.19.1.
12 Article 20, USMCA Rules of Procedure for Chapter 31.}

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_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

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