Mexico Asks for Dispute Panel on Auto ROO; One Expert Says They May Prevail

In order for a vehicle assembled in North America to be originating, six of seven super core parts -- such as the engine, transmission and suspension system, steering system and body -- have to be at least 75% North American, once the transition from NAFTA to USMCA is done.

In order to achieve that 75% regional value, manufacturers can use roll-up -- in other words, considering 100% of an originating component, like a shock absorber or a crankshaft, rather than having to back out every bit of non-originating material, as they get to 75% for the super core part. But, the Office of the U.S. Trade Representative says, when calculating the overall regional content, which must also be 75%, those engines and steering systems only count toward the overall total to the extent they are North American. If they are 80% North American, 20% of the engine's value must be subtracted as the final calculation is done.

Mexico has been arguing that they never agreed to that, and now says that consultations to reach an agreement on the auto rules of origin have been unsuccessful, so they want a dispute panel to settle the question. The government says that Mexico believes that the appendix on auto rules of origin lays out a number of ways to calculate origination for parts and to calculate regional value content, and the U.S. does not agree.

Trade lawyer Dan Ujczo, with extensive experience in North American auto trade, told International Trade Today that Mexico is pushing on two issues -- roll-up at the vehicle level and on the averaging methodology as parts and components are considered.

He said Canada and Mexico on one side and the U.S. on the other took hard lines during consultations. "I am surprised we didn’t end up with a solution," he said. But, he said, the auto industry, and Canada and Mexico never considered that there wouldn't be roll-up to reach the vehicle regional value number. During NAFTA, roll-up was always allowed. "The U.S. has seen it this way arguably from the beginning, but no one else saw it that way," he said.

The Canadian government said that "Canada is considering next steps on this issue."

Ujczo said the auto industry generally wants more flexibility to reach the higher regional value content required under USMCA, but it will be harder for auto companies like Nissan to meet the standard for their Mexican-assembled vehicles than it would be for Ford, which has more extensive parts supply chains in North America.

The CEO of Autos Drive America, which represents the automakers outside Detroit's Big Three, said she agrees with Mexico's position, "and [we] urge an expeditious and fair resolution to the United States-Mexico-Canada Agreement (USMCA) rules of origin interpretation to enable the U.S. market -- and the entire North American trading block -- to reap the full benefits of the agreement." Jennifer Safavian added, "We support a resolution that recognizes the text, negotiating history, and intent of the agreement to ensure the future competitiveness of auto manufacturing in the North American region."

Mexico said they would expect a panel ruling this calendar year.

Adam Hodge, spokesman for the USTR, said, “We are reviewing Mexico’s request to establish a panel and remain confident that the U.S. interpretation of the automotive rules of origin is consistent with the USMCA.”

In the recently settled panel established to review Canadian tariff rate quota allocations, the panel told Canada that even if it had always intended to reserve the large majority of its TRQs to its own processors, since it never communicated that directly to U.S. negotiators, the panel did not think its intention overcomes the language of the treaty.

When asked if an automotive rules of origin panel might look at this issue similarly, Ujczo said yes. "If you take the plain language of the agreement and combine it with 30 years of practice, you end up with roll-up," he said. He said a panel might rule against Mexico on the averaging question, which is complex, and arguably has more room for creative accounting.

A U.S. government official who requested anonymity said that any interpretation of the automotive rules of origin that would reduce the effective regional value content "runs counter to the goals of attracting new investment, creating well-paying manufacturing jobs and ensuring [Canada, Mexico and the U.S.] are the ones that benefit from the duty-free treatment for meeting these new rules."

But Ujczo said that doesn't make sense, given that even a car with 90% North American content still wouldn't qualify if one of its super core parts didn't qualify as North American -- and those super core parts do qualify through roll-up. Requiring that an engine be North American already drives more manufacturing to the region. Requiring that a percentage of the labor be paid at least $16 an hour was already designed to drive more manufacturing to Canada and the U.S. at Mexico's expense. (Though Ujczo said the Japanese carmakers just chose to raise wages in Mexico instead.)

"There’s really no benefit to me of bringing in components, making sure I hit the 75% threshold so I get to count my super core part originating. I’m not getting any tariff benefit at that level," he said, unless the roll-up also works at the vehicle level. Moreover, he said, the high-value jobs are in assembling super core parts and in assembling the vehicle, not in making parts like struts, coil springs or pistons. "It defeats the purpose. You've already achieved what you wanted. At that point, what do you care? Why are there any policy concerns? You’ve already got [former USTR Robert] Lighthizer’s objective."