What are the origins of core parts?

  • October 05, 2023
  • Peter E. Kirby, Steven F. Rosenhek and Daniella Murynka

The “Canada-United States-Mexico Agreement” (“CUSMA”) contains complex rules of origin that dictate how automotive goods qualify as “originating” and, therefore, benefit for preferential tariff treatment. To be eligible for such treatment, automotive goods must meet a prescribed “regional value content” (“RVC”), being the content of the goods originating in North America. CUSMA replaced the former NAFTA origin rules with significantly stricter rules requiring higher RVC in qualifying automobile parts and vehicles. The goal was to encourage North American manufacturing in the automobile sector. The CUSMA origin rules were hotly negotiated by the three governments and by North American vehicle producers who were directly affected — not just with respect to how much RVC was required, but also how RVC was calculated.

Shortly after the agreement was implemented, a dispute arose over the origin rules’ application to certain “core” parts of vehicles. When CUSMA’s origin rules in respect of such qualifying parts are met, the value of non-originating inputs used to make the core parts is “rolled up” and counted as originating. Canada and Mexico argued that core parts that qualified as originating under CUSMA’s calculation provisions should be considered as 100% originating for the purposes of calculating the RVC of the finished vehicle. Under this interpretation, it would be easier for vehicles to qualify for preferential tariff treatment. The United States disagreed, arguing that in calculating the RVC of vehicles, only the non-“rolled up” originating content of the core parts could be counted. This interpretation surprised not just Mexico and Canada, but also the North American automotive industry.

In a final report publicly released in January 2023, a CUSMA arbitration panel (the “Panel”) agreed with Canada and Mexico’s position. The Panel found that automobile producers can “roll up” the value of non-originating content into the RVC of originating core parts when calculating the overall vehicle RVC. A spokesperson for the Office of the United States Trade Representative has called the decision “disappointing,” stating that the United States will “engage Mexico and Canada on possible resolution to the dispute […].”

(a) Key provisions at stake in the dispute

The crux of the parties’ dispute was in relation to Chapter 4 of CUSMA, entitled “Rules of Origin.” Chapter 4 contains a number of annexes, including Annex 4-B, which itself contains an appendix entitled “Provisions Related to the Product-Specific Rules of Origin for Automotive Goods” (the “Autos Appendix”). Key to the parties’ dispute was Article 4.5.4 of CUSMA, a “roll up” provision. Under this article, a party calculating the RVC of a good does not include “the value of non-originating materials used to produce originating materials that are subsequently used in the production of the good.”

(b) The parties’ arguments

Before the Panel, Mexico argued that where an automobile producer calculates the RVC of a core part using the methodologies under Articles 3.8 or 3.9 of the Autos Appendix, and that RVC meets the threshold set out in Article 3.2 of the Autos Appendix, then the core part is “originating,” in accordance with Article 3.7 of the Autos Appendix. Mexico further argued that, applying Article 4.5.4 of CUSMA, the originating core part was then “rolled up” to 100 percent when the core part was used in the production of a vehicle.1

Canada reached the same conclusion in a slightly different way. It referred to Article 3.7 of the Autos Appendix, arguing that it provides that a core part which meets the applicable RVC threshold is “originating.” In Canada’s view, the use of the word “originating” in Article 3.7 of the Autos Appendix had the same meaning as “originating” in Article 4.5.4 of CUSMA and was thus conclusive of the parties’ dispute.2

In contrast, the United States argued that the Autos Appendix created two distinct, bifurcated requirements — a “core parts” origination requirement (Articles 3.7-3.10 of the Autos Appendix) and an “overall vehicle” RVC requirement (Articles 3.1-3.6 of the Autos Appendix), such that a producer could not use Articles 3.8 or 3.9 of the Autos Appendix in calculating core parts RVC for the purposes of determining the RVC of an overall vehicle.3

(c) The Panel’s decision

The Panel summarized the impact of the parties’ dispute as follows:

The difference between [Canada and Mexico’s] and [the United States’] arguments 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. […] In short, [Canada and Mexico’s] interpretation makes it easier for vehicles to qualify for preferential treatment.4

In accepting Canada and Mexico’s interpretation, the Panel was persuaded that the term “originating” was key.5 It concluded that, under Article 3.7 of the Autos Appendix, producers are required to determine whether their core parts are “originating,” and that once they are found to be so, Article 4.5.4 of CUSMA permits producers to “roll up” the RVC of the core part to 100% for the purposes of calculating overall vehicle RVC.6 “To conclude otherwise,” wrote the Panel, “would require an express exemption or the use of different language entirely.”7

Of note, in reaching its conclusion the Panel considered statements made by United States negotiators to Canadian officials and automobile representatives from June 2020. In particular, the Panel found that in one email sent by the lead United States negotiator prior to CUSMA’s coming into force, the United States had “held itself out as sharing the interpretation […] that Mexico and Canada maintained in [the] dispute.”8

(d) What automobile industry participants can expect now

It is likely that Canada will implement the Panel’s interpretation in respect of motor vehicles being exported to Canada. Further, to the extent that Canada can demonstrate losses to Canadian exporters of automobiles to the United States, Canada may implement retaliatory trade measures on United States exports to Canada. Lastly, the parties may choose to take political action in light of the Panel’s decision, including seeking the renegotiation of CUSMA or its automotive origin rules.

Peter E. Kirby is a consultant, Steven F. Rosenhek is a partner and Daniella Murynka is an associate with Fasken.

End notes

1 Final Report of the Arbitral Panel established pursuant to Article 31 of the Agreement among the United States, Mexico, Canada which entered into force on July 1, 2020 [“Final Report”] at para. 106.

2 Final Report at para. 109.

3 Final Report at paras. 111-113.

4 Final Report at paras. 136-138.

5 Final Report at para. 146.

6 Final Report at para. 150.

7 Final Report at para. 150.

8 Final Report at para. 199.