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Updated December 8, 2023
USMCA: Automotive Rules of Origin
The United States-Mexico-Canada Agreement (USMCA;
longer transition period to implement the new ROO (up to
P.L. 116-113) entered into force on July 1, 2020, replacing
five years after USMCA’s entry into force, unless a request
the 1994 North American Free Trade Agreement (NAFTA).
for a longer period is granted). The Office of the U.S. Trade
NAFTA was viewed as instrumental in creating a highly
Representative (USTR) approved alternative staging
integrated North American motor vehicle industry.
requests from 13 companies.
USMCA negotiations over new rules for North American
Table 1. NAFTA and USMCA Automotive ROOs
automotive trade created tensions among and within the
three trading partners. Some uncertainty remains over the
NAFTA
USMCA
implementation of the automotive trade rules and potential
impacts on the North American motor vehicle industry.
62.5% RVC for passenger
75% RVC for passenger
Congress has an oversight role in USMCA implementation
vehicles, light trucks,
vehicles, light trucks, core auto
and U.S.-North American trade relations.
engines and transmissions
parts
Automotive Rules of Origin
60% RVC for other
65%-70% RVC for other
The criteria used to determine the national origin of a
vehicles and auto parts
vehicles and auto parts
product are called rules of origin (ROO). Most free trade
No labor value content
LVC rule stating that 40%-45%
agreements (FTAs) have ROO provisions to determine
rule (LVC) (no wage
of a vehicle’s production by
which goods traded between member countries are eligible
requirement)
value be made by workers
for preferential treatment (reduced tariffs or duty-free
earning at least $16 per hour
trade). They generally seek to ensure that the benefits of the
agreement are granted to goods primarily produced by a
No steel and aluminum
70% of a vehicle manufacturer’s
member country (and therefore subject to the entirety of its
requirement
steel and aluminum purchases
commitments) rather than to goods made wholly, or in large
by value must originate in
part, in other countries.
North America
NAFTA phased out tariffs on automotive products traded
Source: CRS based on USMCA and NAFTA text.
among the three member countries as long as the products
According to USMCA implementing legislation (P.L. 116-
met the ROO, particularly regional value content (RVC)
113), USTR, in consultation with the Interagency
requirements (i.e., a certain percentage of North American
Committee on Trade in Automotive Goods, also established
content). USMCA maintains these tariff eliminations, but
by P.L. 116-113, is required to submit a biennial report to
tightens the ROO, as shown in Table 1.
Congress on motor vehicle trade. The first report was
During the negotiations, motor vehicle and parts producers
submitted to the House Ways and Means and Senate
generally supported retaining NAFTA ROO. The Trump
Finance Committees in July 2022. In the report, USTR
Administration and labor advocates sought to require higher
stated that there was evidence of producers making
wages and RVC thresholds, which they argued would
“significant investments” in North America in order to meet
incentivize manufacturing in the United States. Some
the automotive ROO, but industry is still adapting to the
economists contend that the higher RVC requirements in
more complex rules. USTR noted that it will continue to
USMCA may have unintended consequences. For example,
assess the effectiveness of the rules. In November 2023,
they state that it may be more cost efficient for
USTR launched its second biennial review, with a report to
manufacturers to pay the 2.5% U.S. most-favored nation
be submitted to Congress by July 2024.
(MFN) tariff on passenger vehicles rather than meet the
P.L. 116-113 also requires the U.S. International Trade
extensive ROO requirements. They argue that the new rules
Commission (ITC) to publish biennial reports on the
pose a risk to North American auto production because they
economic impacts of the USMCA automotive ROO through
may raise production costs, resulting in higher vehicle
2031. Since USMCA’s entry into force, U.S. trade of motor
prices, reduced demand for motor vehicles, and fewer auto
vehicles and parts with Canada and Mexico has been
exports, as well as incentivize more automation in
relatively stable (Figure 1). In its June 2023 report, ITC
automotive production, thereby reducing demand for
estimated that through the end of 2022, the USMCA
workers. Even with these concerns, some motor vehicle
automotive ROO had marginal impacts on U.S.
producers support USMCA and say that complying with the
competitiveness, and the full impact of the USMCA
new ROO may be challenging, but probably manageable.
automotive ROO may not be apparent until the ROO are to
Entry into Force and Economic Impact
be fully implemented in 2027. ITC noted that other factors,
USMCA provided a three-year transition period for the new
such as supply chain disruptions during the COVID-19
automotive ROO. It also allowed vehicle producers to
pandemic, had a greater impact than the ROO during the
request an alternative staging regime that would permit a
analysis period (July 2020-December 2022). ITC estimated
that through the end of 2022, the USMCA automotive ROO
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USMCA: Automotive Rules of Origin
contributed to an increase in U.S. aggregate employment of
USMCA dispute settlement process if it continues not to
less than 0.01%, including an estimated 3,912 U.S. vehicle
comply with the ruling.
and parts production workers. ITC also estimated that the
ROO led to 487,048 fewer imports of core auto parts from
Core Parts and Components for Determining Origin
non-USMCA countries and 1,464 more vehicles produced
Engine: Heads, blocks, crankshafts, crankcases, pistons, rods,
in the United States in 2022, which were lower than
head subassembly.
previously forecasted numbers. ITC stated that although
cost increases have not yet been significant, the ROO will
Transmission: Transmission cases, torque converters and
likely lead to higher production costs over time. Some
housings, gears and gear blanks, clutches, valve body assembly.
manufacturers are also choosing to pay a 2.5% tariff for
Body and Chassis: Major body panels, secondary panels,
some vehicles rather than comply with the ROO. Both cases
structural panels, frames.
could lead to higher vehicle prices. ITC initiated the second
Axle: Axle shafts, axle housings, axle hubs, carriers,
report in November 2023, scheduled to be reported to the
differentials.
President and Congress in July 2025.
Suspension System: Shock absorbers, struts, control arms,
Figure 1. U.S. Automotive Trade with Canada and
sway bars, knuckles, coil springs, leaf springs.
Mexico, 2017-2021
Steering System: Steering columns, steering gears/racks,
control units.
Advanced Batteries: Cells, modules/arrays, assembled
packs.
Source: Table A.2 in USMCA Chapter 4, Annex 4-B.
Issues for Congress
Electric Vehicle Tax Credit. The electric vehicle (EV) tax
credit in P.L. 117-169, referred to as the Inflation Reduction
Act of 2022 (IRA), provides a total of $7,500 for new EV
purchases if the EV meets various requirements, including
being assembled in North America and having a battery that
meets specific sourcing requirements. These requirements
may further change the North American automotive supply
chain if producers choose to qualify for the EV tax credit.
Source: CRS analysis of data from U.S. International Trade
Various companies have announced investment plans for
Administration, accessed November 24, 2023.
new and existing facilities to manufacture EVs and batteries
Notes: *USMCA entered into force.
in North America, but some companies have expressed
Automotive ROO Dispute
concerns about the strict implementation of requirements.
U.S. trading partners, including the European Union, Japan,
Since USMCA’s entry into force, Mexico and Canada have
and South Korea, have claimed that the requirements
disputed the U.S. interpretation of the RVC calculation
violate World Trade Organization rules. Some Members of
method. In December 2022, a USMCA dispute settlement
Congress have stated that these requirements are important
panel ruled against the United States. The three countries
for lessening reliance on China and supporting U.S. jobs.
have stated that they are continuing to work towards a
Labor groups have raised concerns about ensuring that the
resolution. The USMCA panel decision cannot be appealed.
EV transition does not negatively impact U.S. workers.
The dispute involves the treatment of material in core motor
As USMCA implementation continues, Congress may
vehicle parts (see textbox). The Mexican and Canadian
examine and consider oversight over the following issues:
governments argued that if a core part qualifies for
• What is the impact of USMCA’s automotive ROO on
USMCA, 100% of its value should count towards the larger
U.S. producers, particularly small- and medium-sized
RVC calculation (referred to as “roll up”). USTR’s
companies, and the North American auto industry?
interpretation was that the overall RVC calculation should
•
exclude the value of materials in core parts that are not
What are the implications of the January 2023 USMCA
sourced from a USMCA country (“non-originating”).
ROO panel decision?
Mexico and Canada contended that these flexibilities were
• How many producers have fully adapted to the rules?
negotiated to help North American motor vehicle producers
Will producers need more than the five years allowed
meet the RVC requirements.
under the alternative staging regime?
•
Under USMCA rules, Canada and Mexico could have
What, if any, are the implementation and/or compliance
begun suspending certain benefits to the United States 45
issues with the LVC requirements?
days after the panel’s final report was issued, but they have
• How will the IRA EV tax credit requirements and
not done so to date. Some U.S. stakeholders, such as labor
general industry pivot towards EVs impact the North
groups, expressed concerns that the ruling undermines
American auto industry and USMCA utilization?
efforts to boost the U.S. auto industry and undercuts
Angela Molina, CRS Research Assistant, contributed to this
workers’ confidence in trade agreements. Some analysts
report.
have argued that the United States may undermine the
Liana Wong, Analyst in International Trade and Finance
https://crsreports.congress.gov
USMCA: Automotive Rules of Origin
IF12082
Kyla H. Kitamura, Analyst in International Trade and
Finance
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