Rules of origin for Passenger Vehicle
and Light Truck of the United States- Mexico-Canada Agreement
Authors: Ernesto Duhne, firstname.lastname@example.org Michel Zelaya, email@example.com Associates, Mexico City
Tel. (+52) 55 5279-5441
This is a general description of the main Rules of Origin for passenger vehicles and light trucks agreed under the new free trade treaty that was recently negotiated by Mexico, the U.S. and Canada. Please note that there are important stipulations in this treaty that might be relevant for purposes of determining the origin of an automotive good, and that are not covered in this article, like de minimis provisions, for example.
The Governments of the United States, Mexico and Canada had concluded negotiations of a new “United States-Mexico-Canada Agreement (“USMCA” or the “Treaty”), which will replace NAFTA. This new Treaty is expected to be signed in the following months and ratified by the local Congress of each of the three Parties (with the U.S. issuing the corresponding implementing legislation), and will probably enter into force at the beginning of 2020.
One of the main goals of this new Treaty is to prevent its benefits from spilling outside of the North American region. Therefore, the new Treaty limits the use of materials that are not from this region. Thus, most relevant changes in this Treaty can be found in the rules of origin that determine when a product is originating (from the North American region) or not.
In relation with the use of non-originating materials, the USMCA establishes that goods produced within the territory would be deemed originating if they satisfy all applicable requirements of Annex 4-B (Product-Specific Rules of Origin) and, specifically for automotive vehicles, of its Appendix of Annex 4-B “Provisions Related to the Product- Specific Rules of Origin for Automotive Goods” (hereinafter, the “Appendix”).
The new Rules of Origin (henceforth “RO”) of USMCA for passenger vehicles1 and light trucks2, provide that in order to be considered as “originating” from North America, such vehicles must comply with the specific requirements applicable to them, regarding:
i) Tariff Shift; and
ii) Regional Value Content or (henceforth “RVC”);
Besides, the RO establishes that the company responsible for producing these passenger vehicles and light trucks shall additionally comply with the following requirements, in order
for the vehicles to be “originating” . These are new requirements, as they are not in
iii) Labor Value Content (henceforth “LVC”);
iv) Steel and Aluminum purchase requirements; and,
v) Some specific Parts and Components must be “originating”.
1 ”Passenger vehicle” is a defined term in the Treaty. It means a vehicle of subheading 8703.21 through
8703.90, except for a vehicle with a compression-ignition engine as the primary motor of propulsion (diesel engines), a three or four-wheeled motorcycle, a motorhome or entertainer coach, or a vehicle that is solely or principally designed for off-road use.
2 “Light truck” is also a defined term, meaning a vehicle of subheading 8704.21 or 8704.31, except for a vehicle that is solely or principally designed for off-road use.
1) Tariff Shift for Passenger Vehicles and Light Trucks.
In this regard, in relation with passenger vehicles, the USMCA establishes that in order to be originating, any non-originating materials must comply with a tariff shift to any other good of subheading 8703.21 through 8703.90 from any other heading; for light trucks non-originating materials must comply with a tariff shift to any other good of subheading
8704.21 from any other heading, provided that for both passenger vehicles and light trucks, there is a RVC of not less than 75% under the net cost method.
2) Transition Period for RVC for Passenger Vehicles and Light Trucks3:
Notwithstanding with the aforementioned, the Treaty provides a transition period beginning on January 1st, 2020, or its date of entry into force, whichever is later, in which the RVC requirement will begin at 66%, and each subsequent year an additional 3% will be added until the requirement reaches 75%, always under the net cost method.
3) LVC for Passenger Vehicles and Light Trucks:
In addition to the RVC, each Party shall provide that a passenger vehicle would be originating only if the vehicle producer certifies, on an annual basis, that its production meets a LVC of at least US$16 dollars4 per hour, as follows:
a) beginning on January 1st, 2020, or the date of entry into force of the Agreement, whichever is later, the LVC will have to be of 30 percent, consisting of at least 15 percentage points of high-wage material and manufacturing expenditures, no more than 10 percentage points of high-wage technology expenditures, and no more than 5 percentage points of high-wage assembly expenditures;
b) beginning on January 1, 2021, or one year after the date of entry into force of the Agreement, whichever is later, the LVC will have to be of 33 percent, consisting of at least 18 percentage points of high wage material and manufacturing expenditures, no more than 10 percentage points of technology expenditures, and no more than 5 percentage points of assembly expenditures;
c) beginning on January 1, 2022, or two years after the date of entry into force of the Agreement, whichever is later, the LVC will have to be of 36 percent, consisting of at least 21 percentage points of high wage material and manufacturing expenditures, no more than 10 percentage points of technology expenditures, and no more than 5 percentage points of assembly expenditures; and,
d) beginning on January 1, 2023, or three years after the date of entry into force of the Agreement, whichever is later, and thereafter, the LVC will have to be of 40
3 Article 4-B.3- 1 of the Appendix
4 The production wage rate is the average hourly base wage rate, not including benefits, of employees directly involved in the production of the part or component used to calculate the LVC, and does not include salaries of management, R&D,
engineering, or other workers who are not involved in the direct production of the parts or in the operation of production
percent, consisting of at least 25 percentage points of high wage material and manufacturing expenditures, no more than 10 percentage points of technology expenditures, and no more than 5 percentage points of assembly expenditures.
Regarding light trucks, the producer will have to certify that its production meets an LVC requirement consisting of at least 30 percentage points of high wage material and manufacturing expenditures, no more than 10 percentage points of technology expenditures, and no more than 5 percentage points of assembly expenditures.
In relation with the above, each Party shall provide that, for the purposes of calculating the LVC of a passenger vehicle or light truck, the calculation may be averaged using any one of the following categories, on the basis of either all motor vehicles in the category or only those vehicles in the category that are exported to the territory of one or more of the other Parties:
a) the same model line of motor vehicles in the same class of vehicles produced in the same plant in the territory of a Party;
b) the same class of motor vehicles produced in the same plant in the territory of a
c) the same model line of motor vehicles or same class of motor vehicles produced in the territory of a Party; or,
d) any other category as the Parties may decide.
Each Party shall provide that when the LVC is certified by the vehicle producer on an annual basis and that relevant records are kept as part of the Record Keeping Requirements under such Treaty, a certification during one year applies to vehicles produced or exported in the following year; that is, the requirement will be considered to be met for all vehicles produced by that producer in the territory of a Party or exported by that producer from the territory of a Party in the following year.
4) Steel and Aluminum Purchasing Requirements:
In addition to the Product-Specific RO, RVC and LVC or other requirements established in the above-mentioned Appendix, each Party shall provide that a passenger vehicle, light truck, or heavy truck is originating only if, during the previous year, at least 70% percent of the vehicle producer’s purchases of steel and aluminum in North America are originating (SIC)5.
5 The text of this requirement includes the following footnote 101: “101. This requirement will apply to a vehicle producer’s purchases throughout North America if the producer has more than one location in a Party where steel and aluminum is purchased. Purchases of steel and aluminum includes both direct purchases, purchases through a services center, and purchases contracted through a supplier.”
This wording is confusing, and thus it is important to carefully review its implementation. First, it states that the “purchases must be originating”. But products are originating, not purchases or other operations. It is not clear if this text means that the steel and aluminum must be originating, but it could be interpreted to mean that the steel and aluminum must be purchased in North America, even from a different origin.
Secondly, by making reference to annual purchases of steel and aluminum of the vehicle producers, the text is confusing in that it does not specify if such requirement applies only to the steel and aluminum actually used in the manufacturing of passenger vehicles and light trucks, or to all purchases of steel and aluminum even if same were used in a different product, such as a different vehicle or truck.
5) Some spec ific Parts and Comp one nts mu st be “ori gin ating” .
Finally, in order for passenger vehicles and light trucks to be originating, certain of their main “parts and components” such as the engine, the transmission, the axle and the suspension, among others, must themselves be “originating”, in accordance with Article 4- B.3(7) of the Appendix to Annex 4-B. This Parts and Components are listed in Table A.2 of this Appendix of the USMCA.6
Two final notes: this memorandum describes the main origin requirements for passenger vehicles and light trucks. Other vehicles, such as heavy trucks, have similar requirements, mutatis mutandis.
Lastly, it is important to point out that the side letter 10. “US Mexico 232 Side Letter” of this Treaty recognizes that the United States and Mexico have made changes to the automotive rules of origin compared to NAFTA 1994, and in order to support and enhance the existing manufacturing capacity and mutually beneficial trade of the Parties, if the United States imposes a measure pursuant to section 232 of the Trade Expansion Act of
1962, as amended, with respect to passenger vehicles classified under subheadings
8703.21 through 8703.90, light trucks classified under subheadings 8704.21 and 8704.31, or auto parts, the United States shall exclude from the measure:
1) 2,600,000 passenger vehicles imported from Mexico on an annual basis
6 “PARTS AND COMPONENTS FOR PASSENGER VEHICLES AND LIGHT TRUCKS
Heads, Blocks, Crankshafts, Crankcases, Pistons, Rods, Head subassembly
Transmission cases, Torque converters, Torque converter housings, Gears and gear blanks, Clutches, Valve body assembly
BODY AND CHASSIS
Major body panels, Secondary panels, Structural panels, Frames
Axle shafts, Axle housings, Axle hubs, Carriers, Differentials
Shock absorbers, Struts, Control arms, Sway bars, Knuckles, Coil springs, Leaf springs
Steering columns, Steering gears/racks, Control units
Cells, Modules/arrays, Assembled packs”
2) light trucks imported from Mexico; and
3) such quantity of auto parts amounting to 108 billion U.S. dollars in declared customs value in any calendar year.
This article is for informational or educational purposes only and not for the purpose of providing legal advice. Therefore, it should not be relied upon as a legal opinion. Please contact an attorney in Santamarina y Steta, S.C., is you require legal advice with respect to any particular provision of this Treaty. Use of and access to this article do not create an attorney-client relationship or obligation between the authors and/or Santamarina y Steta, S.C. and the reader. The opinions expressed at or through this article are the opinions of the individual authors and may not reflect the opinions of Santamarina y Steta, S.C.