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April 21, 2022
USMCA: Motor Vehicle Rules of Origin
The United States-Mexico-Canada Agreement (USMCA),
North American auto production, because they may raise
approved by Congress on January 16, 2020 (P.L. 116-113),
production costs, resulting in higher vehicle prices, reduced
entered into force on July 1, 2020. It replaced the 1994
demand for motor vehicles, fewer auto exports, and
North American Free Trade Agreement (NAFTA).
incentivize more automation in motor vehicle production,
Congress has an oversight role in its implementation and
thereby reducing demand for workers.
U.S. North American trade relations. A major issue
Table 1. NAFTA and USMCA Motor Vehicle ROOs
concerns the new rules of origin for the motor vehicle
industry, which were relatively contentious in the USMCA
NAFTA
USMCA
negotiations and debate surrounding its passage.
Rules of origin (ROO) are the criteria used to determine the
62.5% RVC
75% RVC for passenger
national origin of a product. Most free trade agreements
vehicles, light trucks, certain
have ROO provisions to determine which goods traded
parts
between member countries are eligible for preferential
No labor value content rule
LVC stating that 40%-45% of
treatment. They generally seek to ensure that the benefits of
(LVC) (no wage requirement) qualifying vehicles be
the agreement are granted to goods primarily produced by a
produced by workers earning
member country (and therefore subject to the entirety of its
at least $16 per hour
commitments) rather than to goods made wholly, or in large
part, in other countries. Under USMCA, most goods that
No steel and aluminum
70% of a motor vehicle
contain materials from non-USMCA countries may be
requirement
manufacturer’s steel and
considered as North American (i.e., eligible for preferential
aluminum purchases must
treatment) if the materials are sufficiently transformed in
originate in North America
the region and the transformation results in a change in
Source: CRS based on text of USMCA and NAFTA agreements.
tariff classification (called a “tariff shift”). USMCA’s
general rule is that the regional value content (RVC) is not
The Congressional Budget Office (CBO) estimated that
less than 60% if the “transaction-value” method is used, or
USMCA’s stricter ROOs for motor vehicles and new wage
not less than 50% if the “net-cost” method is used.
requirements will result in a decline in duty-free imports of
Producers generally have the option to choose which
motor vehicles and parts into the United States. A portion
method they use, with some exceptions, such as the motor
of that decline would be replaced by domestic production,
vehicle industry, which must use the net-cost method.
while a portion would be replaced by imports subject to
USMCA also has some product-specific rules for different
duties. CBO estimates that U.S. importers of motor vehicle
industries, which in some cases include additional
and parts not meeting the higher ROO requirements will
requirements, such as for textiles and apparel and motor
pay approximately $3 billion in duties over the next decade.
vehicles and motor vehicle parts.
A 2019 USMCA study by the U.S. International Trade
Motor Vehicle ROO
Commission stated that the ROO changes would have the
NAFTA phased out U.S. tariffs on motor vehicle imports
most significant effects on the U.S. economy and the motor
from Mexico and Mexican tariffs on U.S. and Canadian
vehicle industry and could lead to price increases or vehicle
products as long as they met the ROO requirements.
consumption decrease in the United States.
USMCA maintains these tariff eliminations, but tightens the
ROO, as shown in Table 1. It also has a new provision to
Auto manufacturers in Mexico are concerned that they may
streamline certification requirements and other provisions.
lose U.S. market share to auto imports from Asia. Even
with these concerns, some motor vehicle producers support
Possible Effects
USMCA and say that complying with the new rules of
During the negotiations, motor vehicle and parts
origin may be challenging, but probably manageable.
manufacturers generally supported retaining NAFTA ROO.
Labor groups, however, sought to require a higher
Entry into Force and Implementation
percentage of regional content, which they believed would
USMCA entered into force on July 1, 2020. To help
reduce the share of parts produced outside the United
importers adjust to the new rules under USMCA, U.S.
States.
Customs and Border Protection (CBP) established the
USMCA Center to coordinate implementation of the trade
Some economists contend that the higher RVC content
agreement. CBP staff at the center organized outreach
requirement may have unintended consequences. For
events, developed information resources, and provided
example, they state that it would be more cost efficient for
technical guidance to public and private sector stakeholders.
motor vehicle and parts manufacturers to pay the 2.5% U.S.
MFN tariff rather than meet the extensive ROO
requirements. They argue that the new rules pose a risk to
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USMCA: Motor Vehicle Rules of Origin
USMCA provides a three-year transition period for the new
Core Parts and Components for Determining Origin
ROO. It also allows vehicle producers to request an
alternative staging regime that would permit producers a
Engine: Heads, blocks, crankshafts, crankcases, pistons, rods,
longer transition period (five years) to implement the new
head subassembly.
rules of origin. The U.S. Trade Representative (USTR)
Transmission: Transmission cases, torque converters and
accepted petitions with a draft alternative staging plan from
housings, gears and gear blanks, clutches, valve body assembly.
April 21, 2020 to July 1, 2020. The plan may include
Body and Chassis: Major body panels, secondary panels,
investment or purchase commitments in the United States
structural panels, frames.
and North America to the U.S. Trade Representative
(USTR). Companies with approved requests include Ford,
Axle: Axle shafts, axle housings, axle hubs, carriers,
Honda, Hyundai, Tesla, Toyota, and Volkswagen.
differentials.
Suspension System: Shock absorbers, struts, control arms,
USMCA Dispute Resolution
sway bars, knuckles, coil springs, leaf springs.
USMCA dispute resolutions provisions are intended to
Steering System: Steering columns, steering gears/racks,
resolve disputes through consultation. The party or parties
control units.
alleging that another party is violating USMCA may request
Advanced Batteries: Cells, modules/arrays, assembled
consultations, defined as confidential discussions that include
packs.
good offices, conciliation, or mediation, and if no resolution is
Source: Table A.2 in Annex 4-B, Chapter 4 of the USMCA.
achieved, establishment of a dispute settlement panel. After a
panel renders a decision, it prepares a report. If the findings
determine that the responding party has violated USMCA
The Mexican government argued that the United States is
commitments, the parties must seek to resolve the dispute
not recognizing flexibilities, such as the roll up provision
within 45 days. If a resolution is not reached, then the
that it contends were negotiated to help North American
aggrieved party or parties may suspend certain agreement
motor vehicle producers meet the RVC requirements. The
benefits until the parties agree on a resolution.
Canadian government stated that because consultations
regarding the interpretation of the ROO failed to produce a
resolution, Mexico and Canada moved to the next step of
Motor Vehicle ROO Dispute
the dispute resolution provisions of the agreement. On
A major issue regarding USMCA’s motor vehicle ROO is
January 6, 2022, Mexico requested a panel to resolve the
whether non-originating material in core motor vehicle
dispute, stating that the United States adopted an “incorrect
interpretation” of the ROO. On January 13, Canada
parts (e.g., engine heads and battery cells) deemed
originating (100% North American content) should be
announced that it was joining the dispute as a complaining
included in the calculation of the regional value content
party, stating that it shared Mexico’s view. A panel
(RVC) in larger core parts (see below) or motor vehicles.
reportedly is expected to reach a decision regarding the
USTR’s interpretation of the so-called “roll up provision” is
proper interpretation around September 2022.
that the value of non-originating materials in core auto parts
Issues for Congress
should not be included in the larger RVC calculation in
determining country of origin. In August 2021, the Mexican
USMCA contains key changes in motor vehicle ROO from
and Canadian governments, which argue that the total value
NAFTA and other previous U.S. FTAs, as well as
of core parts deemed originating (North American inputs
congressional reporting requirements. USTR, in
plus foreign inputs) should be counted, formally requested
consultation with the Interagency Committee on Trade in
consultations with the United States.
Automotive Goods, established by the USMCA
Implementation Act, is required to submit a biennial report
to Congress on motor vehicle trade under the agreement (19
U.S.C. §4532(g)(1)). The report is to include, among other
things, a summary of how producers demonstrate
compliance with the ROO, use of the alternative staging
regime, and whether the ROO are effective. The first report
is expected to be submitted to the House Ways and Means
and Senate Finance Committees no later than July 1, 2022.
Another potential issue for Congress is the revision to the
electric vehicle tax credit included in the House-passed
Build Back Better legislation (H.R. 5376). It would provide
up to $12,500 in tax credits for the purchase of electric
vehicles, including $4,500 if a vehicle is assembled at U.S.
plants with unionized labor and an additional $500 if it has
at least 50% U.S. content and battery cells. Canada and
Mexico have stated that the credits are discriminatory and
have threatened to file dispute settlement complaints if they
are approved.
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USMCA: Motor Vehicle Rules of Origin
As USMCA implementation moves forward, Congress may
How could the proposed electric vehicle tax credits be
examine issues and consider oversight related to:
formulated to meet USMCA commitments?
What is the impact of USMCA’s motor vehicle ROO on
Have there been implementation and/or compliance
domestic producers and what are the implications of the
issues with the LVC requirements? If so, what?
current dispute over ROO interpretations?
Liana Wong, Analyst in International Trade and Finance
Are the ROO improving the competitiveness of the U.S.
motor vehicle industry?
M. Angeles Villarreal, Specialist in International Trade
and Finance
How have the new ROO impacted small and medium
motor vehicle producers/suppliers?
IF12082
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