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Updated January 12, 2023
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. The new rules of
Table 1. NAFTA and USMCA Motor Vehicle ROOs
origin for the motor vehicle industry were relatively
contentious in the USMCA negotiations and debate
NAFTA
USMCA
surrounding its passage.
62.5% RVC
75% RVC for passenger
Rules of origin (ROO) are the criteria used to determine the
vehicles, light trucks, certain
national origin of a product. Most free trade agreements
parts
(FTA) have ROO provisions to determine which goods
traded between member countries are eligible for
No labor value content rule
LVC stating that 40%-45% of
preferential treatment. They generally seek to ensure that
(LVC) (no wage requirement) qualifying vehicles be
the benefits of the agreement are granted to goods primarily
produced by workers earning
produced by a member country (and therefore subject to the
at least $16 per hour
entirety of its commitments) rather than to goods made
No steel and aluminum
70% of a motor vehicle
wholly, or in large part, in other countries. Under USMCA,
requirement
manufacturer’s steel and
most goods that contain materials from non-USMCA
aluminum purchases must
countries may be considered as North American (i.e.,
originate in North America
eligible for preferential treatment) if the materials are
sufficiently transformed in the region and the
Source: CRS based on text of USMCA and NAFTA agreements.
transformation results in a change in tariff classification
(called a “tariff shift”). USMCA’s general rule is that
The Congressional Budget Office (CBO) estimated that
the
USMCA’s stricter ROOs for motor vehicles and new wage
regional value content (RVC) is not less than 60% if the
“transaction
requirements would result in a decline in duty-free imports
-value” method is used, or not less than 50% if
the “net
of motor vehicles and parts into the United States. A
-cost” method is used. Producers generally have the
portion of that decline would be replaced by domestic
option to choose which method they use, with some
production, while a portion would be replaced by imports
exceptions, such as the motor vehicle industry, which must
subject to duties. CBO estimated that U.S. importers of
use the net-cost method. USMCA also has some product-
motor vehicle and parts not meeting the higher ROO
specific rules for different industries, which in some cases
requirements will pay approximately $3 billion in duties
include additional requirements, such as for textiles and
over the next decade upon full entry into force. A 2019
apparel and motor vehicles and motor vehicle parts.
USMCA study by the U.S. International Trade Commission
Motor Vehicle ROO
stated that the ROO changes would have the most
NAFTA phased out U.S. tariffs on motor vehicle imports
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
Auto manufacturers in Mexico are concerned that they may
ROO, as shown in Table 1. It also has a new provision to
lose U.S. market share to auto imports from Asia. Even
streamline certification requirements and other provisions.
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 producers
origin may be challenging, but probably manageable.
generally supported retaining NAFTA ROO. Labor groups,
Entry into Force and Implementation
however, sought to require a higher percentage of regional
USMCA entered into force on July 1, 2020. To help
content, which they believed would reduce the share of
importers adjust to the new rules under USMCA, U.S.
parts produced outside the United States.
Customs and Border Protection (CBP) established the
Some economists contend that the higher RVC content
USMCA Center to coordinate implementation of the trade
requirement may have unintended consequences. For
agreement. CBP staff at the center organized outreach
example, they state that it would be more cost efficient for
events, developed information resources, and provided
motor vehicle and parts manufacturers to pay the 2.5% U.S.
technical guidance to public and private sector stakeholders.
MFN tariff rather than meet the extensive ROO
USMCA provides a three-year transition period for the new
requirements. They argue that the new rules pose a risk to
ROO. It also allows vehicle producers to request an
https://crsreports.congress.gov
USMCA: Motor Vehicle Rules of Origin
alternative staging regime that would permit producers a
regarding the interpretation of the ROO failed to produce a
longer transition period (five years) to implement the new
resolution, Mexico and Canada moved to the next step of
rules of origin. The U.S. Trade Representative (USTR)
the dispute resolution provisions of the agreement. In
accepted petitions with a draft alternative staging plan from
January 2022, Mexico, later joined by Canada, requested a
April 21, 2020 to July 1, 2020. Companies with approved
panel to resolve the dispute, stating that the United States
requests include Ford, Honda, Hyundai, Tesla, Toyota, and
adopted an “incorrect interpretation” of the ROO. On
Volkswagen.
January 11, 2023, the panel ruled in favor of Mexico and
Canada’s interpretation of the ROO.
USMCA Dispute Resolution
Issues for Congress
USMCA dispute resolutions provisions are intended to
resolve disputes through consultation. The party or parties
USMCA contains key changes in motor vehicle ROO from
alleging that another party is violating USMCA may request
NAFTA and previous U.S. FTAs, as well as congressional
consultations, defined as confidential discussions that include
reporting requirements. USTR, in consultation with the
good offices, conciliation, or mediation, and if no resolution is
Interagency Committee on Trade in Automotive Goods,
achieved, establishment of a dispute settlement panel. After a
established by the USMCA Implementation Act, is required
panel renders a decision, it prepares a report. If the findings
to submit a biennial report to Congress on motor vehicle
determine that the responding party has violated USMCA
trade under the agreement (19 U.S.C. §4532(g)(1)). The
commitments, the parties must seek to resolve the dispute
first report was submitted to the House Ways and Means
within 45 days. If a resolution is not reached, then the
and Senate Finance Committees on July 1, 2022. It stated
aggrieved party or parties may suspend certain agreement
that there was evidence of producers making “significant
benefits until the parties agree on a resolution.
investments” in North America in order to meet the ROO,
but industry is still adapting to the more complex rules.
USTR will continue to assess the effectiveness of the rules.
Motor Vehicle ROO Dispute
The U.S. International Trade Commission is investigating
A major issue regarding USMCA’s motor vehicle ROO has
the economic impact of the ROO on the United States and
been whether non-originating material in core motor
expects to deliver the report to the President and relevant
vehicle parts (e.g., engine heads and battery cells) deemed
congressional committees by June 30, 2023.
originating (100% North American content) should be
Another related issue for Congress is the revised electric
included in the RVC calculation of larger core parts (see
vehicle (EV) tax credit in P.L. 117-169 (commonly referred
below) or motor vehicles. USTR’s interpretation of the so-
to as the Inflation Reduction Act of 2022). It provides
called “roll up provision” was that the value of non-
$3,750 if the EV is assembled in North America, and
originating materials in core auto parts should not be
another $3,750 if the battery meets specific sourcing
included in the larger RVC calculation in determining
requirements, for a total of $7,500 in tax credit. The North
country of origin. In August 2021, the Mexican and
America final assembly requirement differs from a
Canadian governments, which argue that the total value of
previously proposed bill that would have required U.S.
core parts deemed originating (North American inputs plus
assembly, which Canada and Mexico raised concerns over.
foreign inputs) should be counted, formally requested
The battery sourcing requirements may further change the
consultations with the United States.
North American motor vehicle supply chain if producers
choose to comply in order for their EVs to be eligible for
Core Parts and Components for Determining Origin
the tax credit. Other U.S. trading partners, including the
Engine: Heads, blocks, crankshafts, crankcases, pistons, rods,
European Union, Japan, and South Korea, have stated that
head subassembly.
the requirements violate World Trade Organization rules.
Transmission: Transmission cases, torque converters and
housings, gears and gear blanks, clutches, valve body assembly.
As USMCA implementation moves forward, Congress may
examine issues and consider oversight related to
Body and Chassis: Major body panels, secondary panels,
structural panels, frames.
What is the impact of USMCA’s motor vehicle ROO on
Axle: Axle shafts, axle housings, axle hubs, carriers,
domestic producers and what are the implications of the
differentials.
January 2022 panel decision on the ROO dispute?
Suspension System: Shock absorbers, struts, control arms,
What are the effects of the new ROO on the U.S. motor
sway bars, knuckles, coil springs, leaf springs.
vehicle industry?
Steering System: Steering columns, steering gears/racks,
How have the new ROO impacted small and medium
control units.
motor vehicle producers/suppliers?
Advanced Batteries: Cells, modules/arrays, assembled
How are North American vehicle manufacturers
packs.
responding to the new ROOs?
Source: Table A.2 in Annex 4-B, Chapter 4 of the USMCA.
Have there been implementation and/or compliance
issues with the LVC requirements? If so, what?
The Mexican government argued that the United States is
Liana Wong, Analyst in International Trade and Finance
not recognizing flexibilities, such as the roll up provision
M. Angeles Villarreal, Specialist in International Trade
that it contends were negotiated to help North American
motor vehicle producers meet the RVC requirements. The
and Finance
Canadian government stated that because consultations
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USMCA: Motor Vehicle Rules of Origin
IF12082
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