Written by Sabrina A. Bandali, Jessica Horwitz, Valerie Hughes and George Reid
On August 20, 2021, Mexico filed a request for consultations with the United States under the dispute settlement provisions of Chapter 31 of the Canada-United States-Mexico Agreement (CUSMA, also known as the USMCA) to resolve disagreements between the parties about certain rules of origin related to automotive parts and vehicles.
This is the first step in the state-to-state dispute settlement process that will likely take several months to complete.
While the dispute is between the governments of Mexico and the United States, Canada, as a party to the CUSMA, has a right to participate as a third party. On August 27, Canada provided formal notice of its intention to participate in the consultations. Canada may also choose to bring its own separate challenge against the United States on this matter, especially if it wishes to address different issues from those pursued by Mexico. However, given the caretaker agreement that applies during a federal election, it would have to wait until after September 20, 2021, to do so.
Although private parties and businesses do not have standing to participate in the dispute itself, the Government of Canada consults with private-sector stakeholders to inform its legal and policy positions. Interested parties should make their views known to the Canadian government as soon as possible to ensure that their interests are taken into account in the preparation of Canada’s submissions.
What is the Disagreement?
The dispute relates to the interpretation of the complex rules of origin provisions of the CUSMA that determine whether a vehicle "originates" in a CUSMA country and therefore qualifies for duty-free trade. The United States interprets the rules in a manner that makes it more difficult for vehicles to meet the new threshold of 75 percent regional content (up from 62.5 percent under the NAFTA).
The dispute relates to the interplay between the CUSMA rules of origin applicable to certain automotive parts and the rules of origin applicable to finished vehicles.
Mexico argues that the CUSMA permits parties to include the entire value of so-called core parts of the vehicle (such as engines, transmissions and steering systems) when calculating the overall regional value of the entire finished vehicle—even when some of the components used in the core parts are not 100 percent originating—provided that those parts have already met the 75 percent regional value content threshold specific to core parts.
Only certain components are required to be taken into account when evaluating whether a core part originates. If a core part satisfies the 75 percent regional value threshold either by calculating the value of all non-originating materials in the part or by only calculating the value of non-originating components listed in Column 2 of Table A.2 of Appendix 4-B (the more flexible/less administratively intensive method), it is deemed to be 100 percent "originating" when imported into another CUSMA country for purposes of the core part requirement. Alternatively, the regional content value of core parts can be determined collectively as a single "super-core" part.
Mexico argues that once the core part/super-core part is determined to be originating under the rule of origin applicable to the core part, its entire value (both originating and non-originating content) is considered "originating" for purposes of determining whether a finished vehicle incorporating the core part satisfies the vehicle-specific rule of origin. This practice is referred to as "roll-up."
The United States argues that the more flexible test to determine the origin of core parts does not make these parts originating when calculating the regional content required to qualify a finished vehicle as originating under the CUSMA, i.e., the originating status of core parts does not automatically "roll-up" to the finished vehicle. The United States maintains that these flexible rules were not intended to apply to the determine the originating status of finished vehicles and that only the originating components of the core/super-core parts may be counted toward that finished vehicle value.
The U.S. approach would necessitate a costly and administratively-intensive second regional-value content calculation in connection with those parts not considered as applicable toward the finished vehicle total. Canada agrees with the Mexican interpretation, which favours broader application of the core parts rules of origin in this context.
Under the CUSMA, Mexico and the United States must enter into confidential consultations within 30 days of Mexico's request to seek to arrive at a mutually satisfactory resolution. If consultations fail to resolve the matter within 75 days, Mexico can request the establishment of a dispute settlement panel.
It is unlikely that the parties will be able to resolve the matter in consultations since the parties have been pursuing informal discussions to resolve this difference of interpretation for more than a year, and have yet to reach agreement. At this stage it appears likely that Mexico will request the establishment of a dispute settlement panel this fall to resolve the dispute, in Mexico's first test of the CUSMA's state-to-state dispute resolution mechanism. (Canada and the United States have ongoing Chapter 31 disputes in progress between them relating to trade remedies on solar panels and dairy tariff rate quota allocation).
Canada, as a third party, is entitled to make written and oral submissions to the panel, attend the hearing and receive copies of written submissions of the parties. The panel is required to consider requests from private parties to provide written views on the issues in dispute.
To discuss the implications of this dispute on Canadian automotive supply chains, or for assistance preparing submissions to the Canadian government in connection with this matter, please contact a member of the Bennett Jones International Trade & Investment group.