A Deep Dive into CUSMA: New Automotive Rules of Origin

June 24, 2020

The Canada-United States-Mexico Agreement (CUSMA) will come into force on July 1, 2020, following signing of the original text on November 30, 2018, and after further amendments were agreed upon as of December 10, 2019. The implementation of the CUSMA has been accelerated by the parties, with Canada being last to adopt implementing legislation on March 13, 2020, including on that single day being passed by the House of Commons, all three readings in the Senate and finally receiving royal assent by the governor-in-council. The CUSMA replaces the previous North American Free Trade Agreement (NAFTA), and while many of the NAFTA provisions are carried forward in CUSMA, by far the most significant changes are those applicable to the automotive industry. In this bulletin, we provide an overview of the CUSMA provisions specifically targeting the automotive industry and specifically the new rules of origin applicable to automotive goods.

REGIONAL VALUE CONTENT REQUIREMENTS

Regional value content (RVC) is a measure of the extent of local production within a particular CUSMA party. RVC is a concept that is applied under the CUSMA rules of origin under the “transaction value method” or under the “net cost method” for determining the “originating status” of particular goods. All RVC percentages in this bulletin considers RVC under a net cost method.

Separate RVC requirements exist for vehicles and parts. RVC thresholds for passenger vehicles and light trucks will increase in stages over four years from 62.5 per cent to 75 per cent. Parts for passenger vehicles and light trucks may be categorized as core parts, principal parts or complementary parts. The RVC threshold for core, principal and complementary parts of passenger vehicles and light trucks will start from 66 per cent, 62.5 per cent and 62 per cent, respectively, for the first year of CUSMA, and will increase in stages over four years to 75 per cent, 70 per cent and 65 per cent.

RVC thresholds for heavy trucks will increase in stages over eight years from 60 per cent to 70 per cent. Parts for heavy trucks are either considered principal parts or complementary parts. The RVC threshold for principal and complementary parts of heavy trucks will start from 60 per cent and 50 per cent, respectively, for the first four years of CUSMA, and will increase in stages over 8 years to 70 per cent and 60 per cent.

LABOUR VALUE CONTENT REQUIREMENTS

Under CUSMA, a certain percentage of the value of the vehicle must be made of materials and parts produced and labour—including final assembly—carried out by workers in a plant where the average hourly wage is at least US$16 per hour. This is referred to as labour value content (LVC).

CUSMA tracks three different types of LVC expenditures:

High wage material and manufacturing expenditures: Represents the annual purchase value of parts and material produced in a North American plant with production wages of at least US$16 per hour
High wage technology expenditures: Represents the annual expenditures in North America on wages for research and development, including prototype development, design, engineering, testing or certifying operations
High wage assembly expenditures: Represents the expenditures of an engine, transmission or advanced battery assembly plant—either owned by the producer or engaged under a long-term contract—located in North America with an average production wage of at least US$16 per hour

Separate LVC requirements exist for each of these expenditure types as well as for the total LVC. The LVC thresholds for passenger vehicles start from 30 per cent of total LVC comprising of at least 15 per cent high wage material and manufacturing expenditures, maximum 10 per cent high wage technology expenditures and maximum five per cent high wage assembly expenditures, and increase in stages over four years to 40 per cent total LVC, comprising of at least 25 per cent high wage material and manufacturing expenditures, maximum 10 per cent high wage technology expenditures and maximum five per cent high wage assembly expenditures.

The LVC thresholds for light trucks and heavy trucks are 45 per cent of total LVC comprising of at least 30 per cent high wage material and manufacturing expenditures, maximum 10 per cent high wage technology expenditures and maximum five per cent high wage assembly expenditures. Heavy trucks with a total LVC higher than 45 per cent may use excess percentages of high wage material and manufacturing expenditure over 30 per cent as a credit toward the RVC of heavy trucks above 60 per cent for seven years. This alternative arrangement may be of use for the fifth to seventh year of the coming into force of CUSMA, where the total RVC requirement of heavy trucks is 64 per cent.

STEEL AND ALUMINUM REQUIREMENTS

Additionally, at least 70 per cent of the value of steel and aluminum purchased in North America by producers of passenger vehicles, light trucks and heavy trucks must be originating in order for the passenger vehicles, light trucks and heavy trucks to qualify as originating.

Further, beginning seven years after the entry into force of the CUSMA, all steel manufacturing processes must occur in North America—from initial melting and mixing to the coating stage—except for metallurgical processes involving the refinement of steel additives, for steel to be considered originating. However, this requirement does not apply to raw materials used in the steel manufacturing process, such as steel scrap, iron ore, pig iron, reduced, processed or pelletized iron ore or raw alloys.

While the parties have not specified similar rules for aluminum, the parties are to consider appropriate requirements that are in the interests of all three parties for aluminum to be considered originating 10 years after the entry into force of CUSMA.

ALTERNATIVE STAGING REGIME

For five years after the entry into force of CUSMA, up to 10 per cent of a producer’s passenger vehicles and light trucks may qualify as originating without meeting the RVC and LVC requirements pursuant to an alternative staging regime, subject to following requirements:

The steel and aluminum requirements must be met, unless otherwise agreed by the parties for the vehicles
The LVC requirements for high wage material and manufacturing expenditures must not be reduced by more than five per cent, unless otherwise agreed by the parties for the vehicles
The vehicles qualifying under the alternative staging regime must have an RVC of at least 62.5 per cent the net cost method
The RVC for core parts—except for lithium-ion batteries for electrical passenger vehicle or light truck—must not be lower than 62.5 percent under the net cost method
If the producer wishes to request an alternative staging regime for more than 10 per cent of the producer’s passenger vehicles or light trucks, the producer must submit a “detailed and credible plan” describing the changes the producer intends to make to its operations, sourcing and vehicle content to meet the all origin rules after five years
The passenger vehicles or light trucks qualifying under the alternative staging regime must meet all RVC and LVC requirements after five years after the entry into force of CUSMA

An alternative staging regime for seven years after the entry into force of CUSMA may also be available to producers of heavy trucks upon request.

In order to be considered for an alternative staging regime, vehicle producers must submit a request by July 1, 2020. All three CUSMA parties must agree to the granting of an alternative staging regime to a vehicle producer. The producers are encouraged to review the notices regarding the application for alternative staging regimes published in the U.S. Federal Register and Government of Canada Notice to Producers of Passenger Vehicles, Light Trucks and Heavy Trucks for more information.

SIDE LETTERS REGARDING SECTION 232 OF THE U.S. TRADE EXPANSION ACT OF 1962

On May 31, 2018, the U.S. imposed tariffs on imports of certain steel and aluminum products from Canada at the rates of 25 per cent and 10 per cent, respectively, pursuant to section 232 of the U.S. Trade Expansion Act of 1962. In response and as a countermeasure, Canada imposed the surtaxes at the same rates on steel and aluminum effective July 1, 2018, until May 19, 2019, when both governments reached an agreement to eliminate tariffs and countermeasures on steel and aluminum between the two countries. For our previous comments on the section 232 measures, see our May 2019 Blakes Bulletin: Canada Lifts Retaliatory Surtaxes on Steel, Aluminum and Other Goods.

In this context, Canada has entered into side letters with the U.S. to ensure that certain protective mechanisms are in place for any future section 232 measures. For example, up to 2.6-million Canadian passenger vehicles and up to US$32.4 billion auto parts are annually exempted from the imposition of section 232 measures. These levels are significantly higher than Canada’s current exports of passenger vehicles and parts to the U.S. Light trucks are fully exempt from the imposition of section 232 measures.
Additionally, the side letters provide for a 60-day notice period before the section 232 measures will apply to Canada. Canada is also expressly permitted to take retaliatory action if any section 232 measure is inconsistent with CUSMA or WTO rules.

COMMENTS

The CUSMA is a technically complex agreement and its implementation on July 1, 2020, requires companies doing business in North America to review their operations and plan and prepare for a smooth transition from NAFTA to the CUSMA. The new rules of origin applicable to the automotive industry are by far the most complex of any rules of origin in the CUSMA. It is hoped that the various customs authorities will provide some flexibility in enforcing the rules while the automotive industry transitions from the NAFTA set of rules to the new CUSMA rules.