USMCA Expert Says Auto Decision Will Not Change Sourcing Patterns

A trade lawyer who has clients in the auto industry says that Mexico's and Canada's auto rules of origin arbitration win does not necessarily change sourcing and investment decisions, because automakers were already proceeding as if 100% of originating parts' value would be counted when calculating the regional value content of vehicles.

"This was already baked into parties‘ preparation for USMCA," said Dan Ujczo of Thompson Hine. "Had the decision gone the other way, it would have had significant impact."

A spokesperson for the Office of the U.S. Trade Representative called the decision disappointing, but also said the U.S. would engage with Canada and Mexico "on a possible resolution," though he said those discussions also would cover the implications of allowing roll-up for investment in the region.

United Steelworkers International President Tom Conway reacted to the report's release Jan. 11, saying: "the dispute panel backed the hand waving and fuzzy math that allows corporations to cut corners and dilute the amount of North American content needed to qualify for the preferential tariff consideration.

"... [D]ecisions like these make it harder to trust new tariff reduction agreements, knowing that every word and phrase will need to be stress-tested to ensure that companies and competitors can’t interpret them in a way that kills jobs and opportunity.”

Ujczo said that groups that are deeply upset about the loss are looking at the core-part flexibilities in a vacuum. He said the USMCA requires seven super core parts to be 75% North American, in addition to requiring that the car or truck be 75% North American, and requiring the use of North American steel and aluminum, and making the tariff break dependent on a labor value requirement.

Ujczo lives in Ohio, and he said, "USMCA continues to be a win for North American labor, in Ohio and elsewhere."

He said critics also are not considering how Section 301 tariffs on Chinese auto parts and the specter of forced labor involvement in Chinese auto parts motivate companies to stop buying Chinese components.

"I think, at the end of the day, the USMCA is doing its job, is closing the back door to North America" that was in NAFTA, he said.

He said that not only is the win itself good news for automakers, but also the logic that the panelists drew on -- that the plain language of the text is what can be relied on, and that there are no origination requirements that are not spelled out, that if something is originating for one purpose, it is originating for all purposes. That logic means there should be no more rules of origin surprises, he said. Still, Ujczo said, there is a question of how the rapid response labor mechanism, or the labor chapter of the agreement, could affect automakers in the coming years.

Autos Drive America also pointed to the certainty provided by the panel. “Stable and predictable trade policies are vital to business investments in the United States, and they help to grow and strengthen our economy. International automakers operating in the U.S. welcome the decision affirming the United States-Mexico-Canada Agreement (USMCA) rules of origin text as it was negotiated," CEO Jennifer Safavian said. She said that full implementation of the decision "is of paramount importance to ensure the continued competitiveness of auto manufacturing in our region to receive the full benefits of a rules-based trading system."

The U.S. Chamber of Commerce also emphasized the need for the U.S. to comply. "We urge the administration to quickly implement the panel ruling -- as we urge all three parties to meet their USMCA commitments, including in areas such as energy and agriculture that are also under scrutiny," said Myron Brilliant, head of the international affairs division.

Ujczo said he would be surprised if the U.S. decides to ignore the ruling and the dispute ends up with Canada and Mexico having to impose tariffs on U.S. exports in response.

However, he does think the fact that the U.S. is dissatisfied with Canada's response to a dairy panel ruling and USTR's decision to initiate a dispute over Mexican energy policy may play into how the disagreement is settled. "Everybody kind of has a chit in the game right now," he said, and he doesn't think the U.S. will just agree immediately to change its approach.

The Coalition for a Prosperous America, a protectionist group, urged the Biden administration to refuse to honor the panel's decision. It argued that allowing roll-up could reduce North American content by a third, so that instead of 25% of the value of a car being outside the region, 32% could be.

Ujczo said he thinks that math is off. Most automakers don't aim for exactly 75%, to start with, but the averaging methodologies allowed for parts to qualify do not add up to a big change in overall North American content, he believes -- no more than one to four percentage points.

If the U.S. does change its position on when roll-up is allowed for RVC, Ujczo said there's a question of what it will do with its Alternative Staging Regime agreements. Those letters told automakers they could not use roll-up, and the panel said explicitly that the ASRs should not add that obligation, which was not in the text of the agreement. So the offending provisions should be struck, but Ujczo asked if the USTR then has the authority to deny the new ASRs? Companies have as long as another four years to reach the 75% threshold for all their exported vehicles.

The Coalition for a Prosperous America also said that the U.S. should insist on a more restrictive approach on roll-up when the six-year renewal of USMCA comes up.

Ujczo noted that Canada and Mexico do not have to agree to that during the review, which could then draw out the process for years.

"I think it’s for the benefit for all parties involved that we stop and see if this works," he said. "We made the mistake under NAFTA of assuming that everything is going smoothly, and we may be making the opposite mistake now, of assuming that everything will go wrong."