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First Day of USMCA Dispute Panel Hearing Raises Questions About Future of Auto Manufacturing

Dispute panelists chosen by the U.S., Canada and Mexico grappled with whether Mexico and Canada should have understood the implications of how core parts origination could be established as they negotiated the language in the automotive annex and the standard rules of origin chapter in the USMCA.

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But behind the technical questions of how each paragraph relates to another is the broader question -- is Canada and Mexico's interpretation of roll-up at the vehicle level one that makes USMCA's tougher rules of origin a fiction? Would allowing flexibilities in determining whether engines, chassis or other crucial parts of a car or truck are North American to then flow through to the vehicle regional value content (RVC) calculation mean that automakers would import more inputs from China, South Korea, Germany or Japan, and therefore there would be fewer North American jobs in the industry?

Or, as the Mexicans and Canadians argue, is the U.S. interpretation, which they say came out of the blue just around the time of entry into force, so onerous that automakers would choose to pay most favored nation tariffs instead? And if that's the case, would it just lead to more vehicles being imported from Europe or Asia?

The U.S. accused Canada and Mexico of bringing the complaint because multinational companies with assembly plants in their countries do not want to invest more to be able to meet the higher standard. Their opening argument ended with the assertion that if Canada and Mexico win the case, it could jeopardize the very basis of the support for the agreement in the U.S.

Dominic Gingras, who led the Canadian delegation at the Aug. 2 hearing, responded, "Canada finds this statement deeply concerning." He said political considerations have no place in such a hearing, and that the panel is here to make an objective decision on the merits of the claims.

Earlier, he said he was surprised the disagreement even got this far, given how clear he thinks the text is about the auto rules of origin, and given that Office of the U.S. Trade Representative officials stated explicitly in writing to automakers and to a Canadian diplomat before entry into force that core parts that were determined to be originating would be treated as 100% North American at the time of the vehicle RVC calculation. During Canada's opening statement, they shared copies of emails from USTR staffers saying just that.

For a light truck to avoid a 25% tariff at import in the U.S., it has to go through four different calculations:

Does it have enough North American steel and aluminum?
Was enough of the manufacturing done at $16/hour?
Do the engine, chassis and body, axles, transmission, suspension system, steering, and, if it's an electric vehicle, the EV battery, have enough North American content to be considered originating?
Does the vehicle itself have enough North American content?

So if any one of those bullet points is not met, the truck will not get the tariff benefit -- including if the transmission is not North American, but all the other parts are.

The dispute centers around how automakers do the math to qualify the core parts as originating. There are four ways to do it, and the U.S. says that only the first way would allow the non-North American material to be ignored as you're calculating RVC for the vehicle.

Canada and Mexico say that is contrary to the treaty text, that inherent in an origination determination is the fact that you can then disregard the non-local material as you do the calculation of the final good.

The U.S. says that a major reason to re-negotiate NAFTA in the first place was to stop the loopholes in auto manufacturing such as "deeming" goods to be North American that weren't, and too-liberal use of tariff shifts to get goods to be originating. Its position is that if Canada and Mexico's approach wins the day, it would have been better not to require that an engine have to originate for the vehicle to originate, because in the end, the vehicle will have less North American content than if you'd just required 75% at the vehicle level and ignored how automakers get there.

Kimberly Reynolds, an assistant general counsel at USTR, said "this would turn what was clearly intended to be an additional content requirement into a loophole."

Reynolds said some of the calculation methods to get core parts to qualify already allow automakers to ignore certain components from outside North America, which essentially is already a certain type of roll-up.

Mexico and Canada noted that trade groups from all three countries representing the auto industry filed amicus curiae briefs supporting their complaint. The auto industry says it was also blindsided by this interpretation, and did not think it was agreeing to the end of roll-up at the vehicle level.

In its opening statement, Mexico criticized the U.S. for dismissing the auto industry's public statements about how the lack of roll-up at the vehicle level would make them reconsider adding production in North America. "No-one would be here today if not for the legitimate concerns" of the auto industry, the delegation asserted.

The panelists asked the delegations questions to try to clarify both their positions and the ramifications of the different approaches. Several asked questions concerning the agreements that automakers entered into to get a longer time to get all their vehicles to the 75% North American standard. In the letters the U.S. sent out, it told automakers that in order to get a longer phase-in, they had to agree to not using roll-up when adding up the value of core parts to reach the vehicle-level RVC. And, those automakers had to agree to that not just for the models that needed the longer phase-in, but for all the models they seek USMCA benefits for.

Canada said this is the only place the U.S. interpretation is explicit in writing.

Panel Chair Elbio Rosselli asked the delegations if any automakers have been denied the longer staging period, officially called an Alternative Staging Regime. None have, they said, though some companies have chosen not to ask for one.

Panelist Kathleen Claussen asked if any vehicles have been denied the tariff benefits over this roll-up issue. The U.S. delegation said they would consult with CBP. Gingras said, "To our knowledge, verification has not yet taken place."

Those questions seemed to undermine Canada's and Mexico's assertions that the restriction on roll-up is an impairment for their exporters.

But panelist Donald McRae also questioned the U.S. position that paragraphs in the annex about how to calculate RVC for core parts are completely separate from the general instructions on how to calculate RVC, which apply to vehicles. He noted that if producers use the first of four methods to calculate if core parts originate, all the content of those parts will count as North American when doing the vehicle RVC math. "I find a bit of inconsistency in your argument," he told them.

The panel will continue its public hearing on Aug. 3.