Dispute Panel Rules for Looser Rules of Origin for Autos under the USMCA

Importers rejoice. This needs to be fixed.

President Biden went down Mexico way this week for a North American leaders summit with Mexican President Andrés Manuel López Obrador (AMLO) and Canadian President Justin Trudeau, where they pledged to work together to forge stronger regional supply chains. Then they all got out of there right before a dispute panel announced it was siding with Mexico and Canada and against the United States regarding the rules of origin (ROO) in automobiles under the USMCA trade agreement.

As a result, there will be less North American content in autos that can be sold duty-free in North America, and more content from countries that aren’t party to the agreement.

Here’s what’s at stake. Rules of origin in a trade agreement define what can qualify for lower tariffs or tariff-free treatment in the trading zone. In the case of the USMCA, the zone is North America – Canada, Mexico, and the United States. And the ROO for autos and their core parts, like their engines and transmissions, is set at 75 percent. That’s up from 62.5 percent in NAFTA, which the USMCA replaced a few years ago. The percentage got upped because the United States wanted the agreement to boost auto manufacturing jobs. From Politico (behind a paywall, sorry):

The United States argued that there is a separate requirement for the core parts to contain 75 percent regional content in order to be considered “originating” and if they do not meet that test, then the overall vehicle does not qualify for tariff-free treatment under USMCA.

However, Mexico and Canada argued there is no separate USMCA test for core parts and any part that meets the 75 percent regional content requirement can be rounded up and counted as 100 percent “originating” when calculating regional content for the entire vehicle.

So, to boil it all the way down, Mexico and Canada argued they can “round up” and claim a significant amount of the value of a vehicle is American-made, and the dispute panel laid out in the USMCA’s rules agreed with them.

So where does that leave everybody?

Automakers – who are vowing to pay the import duty on cars if they deem it too expensive to meet the ROO standards – are pleased because now they can include imported products in their autos and avoid tariffs in the North American market. Canada and Mexico are pleased because it will now be easier for auto plants to operate in their countries and sell here … because those plants can use auto parts that aren’t made in North America. Anyway, this isn’t rocket science. You get the idea. Importers are pleased.

The Biden administration, on the other hand, is not pleased.

“The disappointing USMCA panel interpretation of the agreement could result in less North American content in automobiles, less investment across the region, and fewer American jobs. We are reviewing the report and considering next steps,” said Adam Hodge, a spokesperson for the office of the U.S. Trade Representative.

American labor, as you might imagine, is not pleased either. Here’s the what the United Steelworkers had to say:

“Rules governing the origin of automotive components are important to ensuring that products that qualify for duty free status are truly supporting local jobs rather than fueling a race to the bottom on wages and working conditions.

“Instead, the dispute panel backed the hand waving and fuzzy math that allows corporations to cut corners and dilute the amount of North American content needed to qualify for the preferential tariff consideration.

And here’s the United Autoworkers:

The roll-up provisions that automakers fought for are harmful to our members and undermines USMCA’s goal of bolstering the U.S. auto industry. In short, 70% should mean 70% — not 100%. Time and time again workers have been given empty promises, and this is a vital matter that directly affects jobs for workers here in the U.S. Undercutting the integrity of the rules degrades the confidence working people have in trade agreements.

They aren’t wrong. With this ruling a loophole has been picked in the USMCA that undermines one of its fundamental goals: Encourage the development of a North American auto manufacturing sector. There are lots of other countries that manufacture auto parts who didn’t sign onto the USMCA and agree to adhere to its terms. If this ruling stands and the loophole it creates remains, they’ll get to benefit from it.

The U.S., Canada and Mexico need to hash out a better solution to this to ensure only they benefit under this agreement. And if they can’t, it might be time to renegotiate the USMCA.