Lack of Auto Roll-Up Could Lead to More Parts Imports, Lawyer Says
If the U.S. position on calculating the regional content of automobiles prevails in a USMCA state-to-state dispute, Baker McKenzie associate Eunkyung Kim Shin predicted, companies would be likely to import more parts used to assemble the automobiles. Shin, who spoke at a Baker McKenzie webinar Nov. 15, said that when the entire value of a part counts toward the vehicle regional content threshold once that part meets its own rule of origin, it makes sense to build the part in Mexico, the U.S. or Canada. But if the non-local content of those parts is not disregarded when doing vehicle-level calculations, it might be cheaper just to import the parts from a lower-cost country, she said.
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Shin summarized the dispute this way: "For core parts, for things such as engine, chassis, axles and transmission, they must have a 75% regional value content for the part to be USMCA-eligible. But for the finished vehicle, the U.S. is saying non-originating components within those core parts, whether that's valves or crank shafts ... should not count towards the originating status of the finished vehicle, simply because they were used as part of the calculation of the core parts to qualify as USMCA-originating parts."
Canada and Mexico say that interpretation wasn't one they agreed to, nor is it part of the uniform regulations all three countries promulgated for USMCA (see 2208030042). The U.S. argues the purpose of USMCA was to drive more auto jobs to North America, and they "meant this to be narrow" and "want it to be harder for automotive-related products to qualify for USMCA, which is the desired effect of these rules," Shin said.
At a recent International Trade Commission hearing, auto industry officials said they recently learned it will take the panel longer than expected to complete its report, and that the decision probably won't be public until January (see 2211030065). The panel's decision was released to the three countries, however, on Nov. 14, Shin said, citing the docket at the USMCA Secretariat.
Shin said the U.S. may not win at the panel. "The use of roll-up methodologies or similar mechanisms are frequently used in many trade arrangements that we see. And also, various reports are suggesting perhaps the U.S. may not prevail," she said.
But if the U.S. loses, but doesn't change its approach, Canada and Mexico could hike tariffs on U.S. exports to make up for the economic cost of the U.S. refusal to recognize roll-up, Shin noted.