USMCA Update: Rules of Origin and Dispute Resolution

After many years, Mexico, USA, and Canada successfully negotiated and replaced NAFTA (North America Free Trade Agreement), implemented in 1994, with USMCA (United States-Mexico-Canada Agreement), which took effect on July 1, 2020.

USMCA’s Chapter 4 addresses the rules of origin, an important topic for industries like automotive as well as construction. Rules of origin are the criteria used to determine the national source of a product, and will determine whether specific components are free of duties or subject to custom fees. In this regard, companies that use goods with several components are tied to the rules of origin.

Production chains are also affected because producers need to verify that the materials used in the goods comply with the rules of origin. If materials do not comply, producers will need to decide whether to pay customs fees or to use some other suppliers that comply with the rules of origin.

Another issue addressed is the way to solve any dispute related to the interpretation and application of USMCA. USMCA’s Chapter 31 creates a dispute resolution system which strives to operate under the principle of cooperation. Under such basis, a Party may request “Consultations” under Article 31.4, which is a procedure where a Party that feels USMCA is being applied unjustly and/or in an anticompetitive manner by another Party can notify the other Party in writing of the reason for the request and legal basis for the complaint. USMCA requires the Parties to make every attempt through cooperation and consultations to arrive at a mutually satisfactory resolution. If the Parties do not arrive a resolution through the consultations, they can start the procedure to establish a Panel to make findings, determinations, and recommendations.

On this basis, in August 2021, Mexico requested USMCA consultations with the United States to solve a dispute over differing interpretations of the automotive rules of origin. 

The dispute relates to how the United States was calculating the Regional Value Content (RVC) for an automobile’s core parts to fulfill the rules of origin. Core parts of an automobile must have a 75% RVC to qualify as having USMCA origination.

Mexico argued that the United States’ interpretation imposes strict requirements inconsistent with considering a core part qualify as originating as long as it satisfies the 75% RVC requirement. This interpretation could make products cost more due to import duties and be less attractive than competitor markets.

The consultations did not resolve the dispute. For that reason, on January 6, 2022, Mexico requested a Panel, which under Article 31.9 consists of five members and may render findings, determinations, and recommendations regarding the differing interpretations. Canada recently announced that it would join Mexico in requesting the Panel. A decision is expected around September 2022. Although this dispute only relates to automotive rules of origin, it may affect all manufactured goods.

 Author Juan Pablo Sandoval: jpsandoval@comad.com.mx.