Background

A new report from the Office of the U.S. Trade Representative concludes that in the two years since the U.S.-Mexico-Canada Agreement’s entry into force, vehicle and parts producers have been making significant investments in North American sourcing and production to meet the USMCA’s auto rules of origin. They are also taking advantage of flexibilities afforded under the agreement to prepare future production (e.g., electric vehicles) for compliance with those rules.

At the same time, producers have reported complexities associated with adapting to the new recordkeeping and calculations required under the auto rules of origin. For example, one commenter said the burden of costs and certifications is so high that some suppliers choose not to perform the necessary calculations and documentation and instead simply label auto parts as non-originating even if they might otherwise qualify under the USMCA. These difficulties have put a further strain on companies that are simultaneously dealing with critical input shortages and supply chain challenges resulting from the COVID-19 pandemic, Russia’s war against Ukraine, and other developments.

The USMCA’s rules of origin for motor vehicles require a specific amount of North American content in the final vehicle for it to qualify for duty-free treatment. Specifically, the agreement raises regional value content requirements to 75 percent for passenger vehicles and light trucks (compared to 62.5 percent under NAFTA), requires certain core parts to meet the higher RVC thresholds for the entire vehicle to qualify, and requires that at least 70 percent of a vehicle producer’s steel and aluminum purchases originate in North America. The USMCA also requires that a certain percentage of qualifying vehicles be produced by employees making an average of $16 per hour. Vehicle producers may request an alternative staging regime for these requirements that would permit a longer period of transition to help ensure that future production is able to meet the new rules.

According to the report, some commenters say these rules may need to be adapted in the future to reflect the ongoing shift away from internal combustion engines toward zero-emission electric vehicles. Some believe USTR should maintain flexibility in the rules to reflect that many of the minerals and inputs needed to produce EV batteries are not available in North America, while others have proposed to add various EV components to the list of core parts.

For more information on the USMCA auto rules of origin, please contact attorney Mark Tallo at (202) 730-4968 or via email.

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