Long Awaited USMCA Panel Decision on Automotive “Core Parts” – What Happened and What’s Next
On January 11, 2023, a dispute settlement panel organized under the United States – Mexico – Canada Agreement (USMCA) released its Final Report in regard to a complaint lodged by Mexico and supported by Canada that the US was not applying the correct interpretation of the methodologies for certain “core parts” in determining whether a passenger vehicle or light truck qualifies for preferential tariff treatment under the USMCA. The official release of this Final Report in favor of Canada and Mexico was expected following weeks of speculation and unconfirmed reports regarding its contents.
The US has maintained that the special rules for meeting the North American content requirement for core parts could not be used in the overall regional value content (RVC) calculation of passenger vehicles and light trucks, leading to Mexico and Canada challenging this interpretation of the USMCA. If the US follows the panel decision, vehicle producers will be able to “roll up” to 100% the North American content of core parts using the special rules such as the “super-core” calculation.
The Mexican and Canadian interpretation of these special rules for core parts makes the USMCA qualification easier for the passenger vehicles and light trucks that incorporate these core parts. The Final Report also has potential impact on vehicle qualification under the USMCA’s Alternative Staging Regime provisions.
The report has no bearing on the USMCA qualification of automotive parts if imported into a USMCA country separately. However, it likely would eliminate the need for automotive suppliers to perform multiple USMCA calculations regarding their core parts.
The 42-page Final Report concludes that the agreement did not include a separate, self-standing core parts “origination requirement.” In making its decision, the panel considered evidence that US negotiators had expressed agreement with the interpretation advanced by Mexico and Canada both during the negotiations and before and after the agreement had been signed. The report makes clear that the disagreement in positions taken “is substantial because it affects, and possibly to a significant extent, the amount of ‘regional’ content that a vehicle contains and, therefore, whether that vehicle can receive preferential tariff treatment.”
The seven defined core parts provided in the USMCA — the engine, transmission, body and chassis, axle, suspension system, steering system and where applicable, the advanced battery — comprise the most valuable parts of a vehicle. A complete list and HTS descriptions can be found in our New Automotive Origin Rules for the USMCA.
Immediate Next Steps and Possible Consequences
In relation to the Final Report, the relevant USMCA provisions encourages further negotiation among the parties to resolve the dispute. If no resolution can be found, the USMCA would allow Mexico “to first seek to suspend benefits in the same [product] sector.” It will be up to the United States to decide whether to agree to the level of suspension or seek the dispute panel’s considerations from the report.
Since the release of this Final Report, Mexico City issued a statement that it will “begin a process of dialogue and cooperation with its trading partners.” As of the time of this writing, a USTR spokesperson described the ruling as “disappointing” and stated that the US “will engage Mexico and Canada on a possible resolution to the dispute, including the implications of the panel’s findings for investment in the region.”