US Says Canadian, Mexican RVC Approach Would Weaken Auto Industry

In filings at the USMCA Secretariat, Mexico and Canada say the Uniform Regulations for USMCA are clear, and say that " roll-up applies to the calculation of [regional value content] RVC for a vehicle. It obliges Parties to take 'no account' of the non-originating materials contained in an originating good when that good is used in the subsequent production of another good."

The U.S. says although there are some flexibilities and roll-up allowed to get to origination status for either core parts, or super core parts, if you count the non-North American percentage of core and super core parts toward RVC, it undermines the goal of increasing North American content and shoring up the auto industry.

"In fact, under Complainants’ interpretation, the negotiators would have better achieved their goal of increasing the RVC of vehicles had they not included the core parts origination requirement at all. This absurd result is contrary not only to the text and structure of Chapter 4 and the Autos Appendix," but to the goal of supporting manufacturing jobs in the region, the U.S. wrote.

The panel will hold a hearing Aug. 2 and 3 on the parties' claims, and is supposed to make a decision within 45 days of the hearing.

Mexico brought the complaint that the U.S. is adding obligations that it and Canada did not agree to during negotiations through its interpretation of auto rules of origin. Canada joined the case.

Both Mexico and Canada have submitted emails between USTR staff and auto companies and foreign government officials about the issue, and say that the U.S. was saying roll-up was allowed before it changed positions.

Canada wrote, "Both non-governmental entity submissions in this case, from the Global Automakers of Canada (GAC) and the Mexican Automotive Industry Association (AMIA), indicate that industry shared the understanding of Canada and Mexico prior to entry into force of CUSMA," as Canada calls USMCA.

Some of the supplemental materials that the Canadians and Mexicans want the panel to consider are emails from two men who were career staff, who helped shape the rules of origin language, but who are no longer with the agency. While they were still at the agency, they were working on launching their own consulting firm for automakers (see 2008050007).

The U.S. says these materials should not be considered, because they were long after negotiations concluded, and it also dismisses Mexican negotiators' affidavits, because they are personal recollections years after the negotiations concluded. Those affidavits support Mexico's contention that it would never have agreed to changing the approach to roll-up that was allowed in NAFTA. The U.S. submissions also suggest that the career staffers had ulterior motives, and given the fact that they left the employ of the Office of the U.S. Trade Representative after this conflict of interest was exposed shows how their opinions are irrelevant.

Canada wrote: "The U.S. attempt to undermine or diminish the value of these statements by arguing that they were made by 'staff-level' employees as opposed to individuals at the Ministerial, Vice-Ministerial or Chief Negotiator levels is unavailing," and also noted that C.J. Mahoney, a political appointee, wrote an automaker in May 2020, and what he said was inconsistent with the current no-rollup interpretation.

The two sides argue about how much allowing roll-up would undermine the goal of supporting North American auto production. Canada says that such a strict ROO would not incentivize production in North America.

It also says the U.S. is wrong to say that all three countries decided to renegotiate NAFTA because they were dissatisfied with the amount of North American content in autos that were getting tariff benefits, either because of deeming or because of the threshold for regional value content.

"As in any negotiation, Canada and Mexico had their own objectives and desired outcomes," Canada wrote.

Canada said that because of roll-up, the U.S. says a car or light truck could have as little as 69% North American content but count as 75%, and thus qualify for the tariff benefit. But Canada says that since parties estimate that deeming practices under NAFTA allowed 10% of the vehicle to be ignored in RVC calculations, and the old standard was 62.5%, even the worst-case scenario is 16 percentage points above the NAFTA standard. "Thus, to the extent that increasing North American content requirement was a shared objective of the CUSMA Parties, Canada's interpretation is a spectacular success," Canada wrote.

Canada says that if the three countries "had wanted to indicate that the core parts RVC calculations were entirely separate from the vehicle RVC calculations, they would have done so more clearly."

The U.S. notes that it, Canada and Mexico all agree that even if a car were 75% North American, if its supercore parts were not originating in the region (except EV batteries), the car would not get the benefits. It also notes that they all agree that steel and aluminum content and labor value content rules are needed to qualify, as well.

"The seven defined core parts -- the engine, transmission, body and chassis, axle, suspension system, steering system and where applicable, the advanced battery -- represent some of the most valuable parts of a vehicle," the U.S. argues, though the percentage of the total value was redacted in its submission.

"Under the generally applicable 'roll-up' provision in Article 4.5.4 of the USMCA, 100% of the value of a part that is used in a final product is treated as originating, for purposes of calculating the RVC of the final product, if the part crosses a threshold of North American content," the U.S. wrote. "The provisions in Articles 3(7)-3(9) setting out core parts origination requirement do not cross-reference or amend this 'roll-up' calculation."

The U.S. lawyers said that if you allowed roll-up, it would weaken the RVC standard, and that depending on the way a car or truck was constructed and priced, even a car that met the core parts standard could be as little as 60% North American. In all its examples, calculated by the International Trade Commission, the U.S. way of calculating ROO would disqualify the vehicles, and the Canada/Mexico approach would qualify them.

The U.S. also noted that CBP has been consistently telling automakers that core parts can't roll up since July 8, 2020. Its argument also said that the longer phase-in granted to most automakers doesn't allow roll-up in the way Canada and Mexico are asking.