USMCA panel rules against US on auto rules of origin

In January 2023, a dispute settlement panel under the U.S.-Mexico-Canada Agreement ruled against the United States in a case brought by Mexico and Canada over rules of origin for passenger vehicles, light trucks and their parts. The panel's final report was filed with the U.S. Trade Agreements Secretariat on Jan. 11.

What was in dispute

Rules of origin decide whether a good counts as "originating" under the agreement and so qualifies for preferential tariff treatment. For vehicles, a central test is regional value content, or RVC, which measures how much of a vehicle's value comes from the region.

The case turned on the agreement's "roll-up" provision. Under roll-up, a good that qualifies as originating is treated as 100% originating when it is used to make another good, so the value of its non-originating inputs is disregarded.

The U.S. did not apply roll-up to originating "core parts" when calculating a vehicle's RVC. Mexico and Canada argued that it should.

The ruling

The four-member panel, chaired by Elbio Rosselli, concluded that the agreement contains no separate, self-standing core parts "origination requirement." Core parts that qualify as originating can be counted as originating material in a vehicle's RVC calculation, it found.

The panel said the U.S. interpretation and application were inconsistent with Article 4.5 of the agreement and Article 3 of its autos appendix. It also found the U.S. breached Article 8 of the appendix by attaching a condition not listed in the agreement to its approvals of "alternative staging regimes." Those are transitional arrangements that let automakers import some vehicles under different requirements until Jan. 1, 2025.

The panel noted that the only evidence it received on negotiating history showed U.S. negotiators had expressed the same reading as Mexico and Canada, both to Canada and to the auto industry, during the talks and before and after the signing.

Canada's response

Canada's trade minister, Mary Ng, welcomed the findings on Jan. 11. She said they "reaffirm our understanding of the negotiated outcome on the rules of origin for automotive products" and that Canada looked forward to working with the U.S. and Mexico on continued implementation of the agreement.

What it meant for carriers

The agreement took effect July 1, 2020, and its auto rules determine which vehicles and parts qualify for preferential treatment as they move among the three countries. The ruling backed the Mexican and Canadian method for counting originating core parts toward a vehicle's regional content. For carriers that haul auto parts and vehicles across both borders, the case showed that the content rules behind that freight could be challenged through the agreement's own dispute process.