March 6, 2020

UNITED STATES-MEXICO-CANADA AGREEMENT CHAPTER 4 RULES OF ORIGIN


I. INTRODUCTION.

The USMCA’s Chapter 4 on Rules of Origin is relevant for trade among the Parties, because it sets forth the criteria to determine the origin of a product, therefore determining whether a product is subject to preferential tariffs and to other non-tariff-based benefits. In this regard, the USMCA implements important changes to the existing Rules of Origin chapter of the North American Free Trade Agreement (NAFTA), particularly with respect to the automotive and auto parts industries, as detailed below.

II. EXECUTIVE SUMMARY.

Chapter 4 of the USMCA contains the agreements and provisions regarding Rules of Origin, both general and specific, establishing the criteria and procedures to determine the applicability of tariff and non-tariff-based benefits offered by USMCA, including the following matters:

1. General Rules of Origin;

2. Specific Rules of Origin;

3. Treatment of recovered materials used in the production of remanufactured goods;

4. Determination of the Regional Value Content;

5. Value of materials used in production and adjustments to such value;

6. Accumulation and de minimis rules;

7. Treatment of fungible goods and materials;

8. Treatment of accessories, spare parts, tools, instructional materials, packaging materials and containers, sets of goods, kits or composite goods;

9. Transit and transshipment; and

10. Non-Qualifying transactions and operations.

III. LEGAL DISCUSSION.

This summary is divided into two main sections. The first section focuses on significant general changes to the Rules of Origin Chapter, in comparison to NAFTA, and the second section addresses significant provisions specifically relating to the automotive and auto parts industries.

General Changes.

Article 4.8: Intermediate Materials. The USCMA establishes that any self-produced material, other than engines and transmissions (which are components listed on Table G of the Appendix to Chapter 4), used in the production of a good, may be designated by the producer as intermediate material for purposes of calculating the regional value content, provided that, if the intermediate material is subject to a regional value content requirement, no other self-produced material subject to a regional value content requirement used in the production of that intermediate material may be designated by the producer as intermediate material. Therefore, in order to designate any raw material used in the production of a good as self-produced material, such raw material may not contain any raw material also designated as intermediate material.

Article 4.12: De Minimis. To be considered an originating good for USMCA purposes, the allowed value of non-originating materials that do not undergo an applicable change in tariff classification is increased from 7 percent, as provided in NAFTA, to 10 percent, based either on the transaction value of the good, excluding any costs incurred in the international shipment of the good or the total cost of the good.

Article 4.13: Fungible Goods and Materials. Several provisions included in NAFTA’s Uniform Regulations (General Rules for the Application of the Provisions on Customs Matters of the North American Free Trade Agreement for Mexican purposes) were added directly to the USMCA, including the provisions governing fungible goods.

Article 4.14: Accessories, Spare Parts, Tools or Instructional or Other Information Materials. Similarly, provisions included in NAFTA’s Uniform Regulations were added in Article 4.14 as relates to accessories, spare parts, tools and instructional or other information materials.

Changes Relating to the Automotive and Auto Parts Industries.

Article 4.10: Automotive Goods.

1. Regional Value Content. NAFTA states that for a passenger vehicle or light truck to be considered as originating, it must comply with a minimum regional value content of 62.5 percent. The USMCA, on the other hand, in the Appendix to Annex 4-B (Product Specific Rules of Origin), establishes that as of the date of entry into force of the USMCA, the minimum regional value content will be 66 percent under the net cost method, increasing three percent each year, until reaching 75 percent.

2. Essential, Main and Complementary Parts. In an important shift, the USMCA eliminates NAFTA’s automotive tracing requirements, known as the “tracing list,” which currently requires producers to maintain strict control of the value of non-originating parts and components used in the production of a vehicle in order to calculate the regional value content. Instead, the USMCA sets forth specific regional value content requirements for key parts and components. These parts and components are divided into three different categories, establishing a minimum regional value content for each as follows: i) Tables A.1 and A.2 of the Appendix to Annex 4.B of Chapter 4 establish that the core parts and components, which include engines, axles, batteries, chassis, transmissions, and suspensions, among others, must reach a minimum of 66 percent regional value content on the date of entry into force of the USMCA, increasing 3 percent each year, up to 75 percent; ii) Table C of said Appendix establishes that the principal parts and components, which include brake systems, air conditioners, fuel systems, and exhausts, among others, must reach a minimum of 62.5 percent regional value content on the date of entry into force of the USMCA, increasing 2.5 percent each year, up to 70 percent; and iii) Table C of said Appendix further establishes that the complementary systems, which include switches, valves, wire harnesses, lighting, and locks, among others, must reach a minimum of 62 percent regional value content on the date of entry into force of the USMCA, increasing by 1 percent each year until reaching 65 percent.

3. Steel and Aluminum. As an additional requirement, the USMCA establishes that to consider a vehicle as originating, at least 70 percent of the producer’s purchases of steel and aluminum in a determined period must qualify as originating. The producer may calculate the purchases over: (a) the previous fiscal year of the producer; (b) the previous calendar year; (c) the quarter or month applicable to the date the vehicle is exported; (d) the producer’s fiscal year applicable to the date the vehicle is exported; or (e) the calendar year applicable to the date the vehicle is exported.

4. Labor Value Content. The USMCA also introduces a new requirement for a vehicle to be considered as originating, setting forth that, as of the date of entry into force of the USMCA, a certain percentage of labor value content must be incorporated in areas where the minimum wage is at least US$16.00 per hour. In the case of passenger vehicles, the USMCA establishes a minimum labor value content of 30 percent as of the date of entry into force of the USMCA, increasing annually until reaching 40 percent. In the case of trucks, the USMCA establishes a minimum labor value content requirement of 45 percent, as of the date of entry into force of the USMCA.

5. Side Letters 6 and 7 Pursuant to Section 232 of the 1962 Trade Expansion Act. As part of the negotiations carried out between Mexico and the United States, their governments signed bilateral agreements known as “Side Letters,” including Side Letters 6 and 7 pursuant to Section 232 of the Trade Expansion Act of 1962 of the United States, which empowers the President of the United States to adjust imports of goods and materials if he deems the quantity or circumstances surrounding those imports to threaten national security. In this regard, both Parties agreed that if such a situation arises, the United States will allow the importation of up to 2.6 million units of passenger vehicles per year, up to $108 billion dollars of auto parts per year and an unlimited number of light trucks originating from Mexico, without imposing any tariffs or restrictions.

IV. CONCLUSION.

The most relevant provisions to the USMCA’s Rules of Origin Chapter are directly focused on the automotive and auto parts industries, since the specific rules of origin applicable to goods of those industries have been tightened as compared to the more flexible rules of origin currently found in NAFTA. Therefore, it is imperative for companies in these industries to take into consideration that their products must now comply not only with a higher regional value content, but also with new requirements established under the USMCA, such as the labor value content and the requirement to make minimum purchases of originating steel and aluminum. Accordingly, companies in the automotive industry are highly recommended to conduct an analysis and make the proper adjustments to their operational and production processes. Failing to do so could limit their ability to gain access to the preferential tariffs offered under the USMCA and to continue participating in the attractive market that the USMCA region represents. This is especially true given that the United States is currently the world’s second largest consumer of vehicles.

CONTACT INFORMATION.

Rene Cacheaux | rcacheaux@ccn-law.com
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Daniel Cavazos | dcavazos@ccn-law.com
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Joseph B. Newton | jnewton@ccn-law.com
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Miriam Name | mname@ccn-law.com
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Enrique Hill | ehill@ccn-law.com.mx
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