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Panel Must Decide If USMCA Implies There's Only One Way to Calculate Vehicle RVC

The dispute panel grappled with what Mexico characterized as "the heart of the dispute" in its second day of a hearing about whether Canada and Mexico or the U.S. is right about one aspect of the complex USMCA auto rules of origin.

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The parties agree that in order for a car to qualify for tariff benefits under the agreement, the vehicle must have core parts -- engine, chassis and body, axles, transmission, suspension system, steering, and, if it's an electric vehicle, the EV battery -- that are of North American origin. In order to be originating, those parts, except for the EV battery, must be 75% North American. Even if the light truck or car is 75% North American overall, if its engine is imported from Germany or Japan, it cannot avoid most favored nation tariffs.

Automakers can choose from four methodologies to determine if core parts are originating: the standard way; a calculation that averages the non-regional content across all the core parts; and doing a calculation ignoring certain inputs that are not considered key inputs to the core parts, whether for each part individually, or, again, through an average across the group.

Orlando Perez Garate, director general of Consultoría Jurídica de Comercio Internacional and the lead of the Mexican delegation, said through an interpreter that all of these methodologies still have to get the parts to 75% North American content. "The problem we have, once the producer uses one of those four choices, and the part is originating, the U.S. implies you have to use a standard methodolgy always." He said, because if not, the originating parts are not considered 100% North American content; rather, you can only count the North American inputs as you do the math for the entire vehicle. He said that's the heart of the dispute.

Annelies Winborne, deputy U.S. trade representative for monitoring and enforcement, said when you look at the four methodologies, the second one is easier to meet than the first, the third easier still, and the fourth option allows the most content outside the region to be disregarded and still get to 75% for the parts as a group.

"It's much easier to qualify" through the fourth methodology, she said, responding to a question from panelist Jorge Miranda.

Perez Garate said Mexico disagrees that the methods -- labeled 8a, 8b, 9a and 9b in the annex -- progress from more stringent to looser. "9b cannot be considered more flexible than 8a," he said through an interpreter. Instead, he said, 8b and 9b require less tracking of part costs, and therefore are less of an administrative burden.

Winborne said that argument isn't credible. She said you can meet the core parts requirement under 9b when you wouldn't be able to under 8a, which is the standard regional value content (RVC) methodology -- and the one used at the vehicle level.

Since these alternative methodologies are only allowed for this new core parts requirement, Winborne argued that to allow their benefits to flow through to the end good's calculations makes the core parts requirement not an extra hurdle for automakers to clear, but a back door into lower RVCs for cars and trucks.

In her closing statement, she said that Mexico's and Canada's interpretation, if it is decided to be the correct one, would lead to cars and trucks getting tariff benefits "with less, and sometimes much less North American content than under the standard methodology."

Mexico and Canada emphasized their view that the U.S. came up with this no-roll-up-for-alternative-methodologies rule on its own, after the negotiations concluded, and said that if all had to agreed to it, there would be a specific carve-out in the text of the automotive annex, or in the uniform regulations, and it is not in either place.

Dominic Gingras, general counsel at Canada's trade law bureau and the lead of Canada's delegation, said in his closing argument, "By focusing its arguments on the U.S. negotiating objectives, the United States seems to recognize that there's no merit to its structural or textual arguments." He said that U.S. textual arguments had "unraveled" over the course of the hearing (see 2208020074).

Gingras argued that even with the flexibilities to get core parts to originate, in order to get tariff benefits, vehicles will have to have more North American content once USMCA is fully phased in than they did under NAFTA. He said that at a minimum, they will be 6.5 percentage points higher, and nearly 20 percentage points higher when you consider the way deeming parts and tariff shifts eroded the old RVC.

But, he said, examples of how the varying interpretations of roll-up might affect a specific vehicle's North American content are irrelevant. "The answer to this question lies in the CUSMA text," he said, using the Canadian name for USMCA. "The data presented by the United States says nothing about that issue. It's simply a distraction."

Kimberly Reynolds, assistant general counsel at USTR, said in the U.S. closing statement that the existence of Table 2, which lays out which inputs' outside content have to be considered when using 8b or 9b methodologies, only exists because these are different calculations than are necessary to determine RVC at the vehicle level. These flexibilities are not available when calculating the regional value content of a vehicle, she said. "You know this, because they are not referenced [to the paragraph that] prescribes the rules for how to calculate the regional value content of the vehicle," she said, adding that there's also express language limiting the calculations in 9a/9b to core parts origination requirements.

Reynolds also addressed Canada's and Mexico's indignant response to the U.S. argument that if their position is victorious, it will undermine American support for USMCA. Unlike under NAFTA, commitment to this treaty must be reaffirmed by all three parties periodically. She said, "There is nothing surprising or shocking about drawing the panel's attention to the real-world implications of this dispute."

The panel will make its initial report by Oct. 12, and its final report Nov. 10, though the report is not immediately released to the public.