New Automotive Origin Rules for the USMCA

Automotive Rules of Origin and Procedures Overview

Appendix I, Automotive Rules of Origin and Procedures, to the CBP Instructions provides guidance on the USMCA automotive rules of origin by incorporating the appendix to Chapter 4 of the USMCA Implementation Act (Automotive Appendix) and clarifying details on:

• Super-core provision clarification,
• LVC,
• Steel and aluminum purchase requirements, and
• Alternative staging regime.

The CBP Instructions do not change the increased RVC requirement for passenger vehicles, light trucks, heavy trucks, other vehicles, and parts thereof outlined in the USMCA text and US implementing legislation.  In addition to the higher RVC requirement, which will increase to 75% for most vehicles and core parts following a three-to-five-year transition period, USMCA certifiers will not be able to count certain non-North American inputs as originating content as they have been able to do under the NAFTA.

Below is a summary of these new details from the CBP Instructions. We expect additional information and clarification in the forthcoming regulations and guidance.

Super-core Provision Clarification

As noted above, the CBP Instructions incorporate the Automotive Appendix. Specifically, the implementing instructions carry forward the Automotive Appendix’s product-specific rules and RVC calculations for automotive goods (i.e., passenger vehicles, light trucks, heavy trucks, other vehicles, and parts corresponding to these vehicles). See Article 2, 3, 4, and 10 of the Automotive Appendix.

Thus, as previously reported and addressed in the Automotive Appendix, the USMCA Automotive rules of origin raise the domestic content requirement for automotive goods and introduce other new complexities that differ from NAFTA. For example, the phased-in increase of the RVC requirement for passenger vehicles and light trucks starts at 66 percent under the net cost method and increases by 3 percent per year until it reaches 75 percent three years afterward.

Within this RVC requirement for passenger vehicles and light trucks, the corresponding parts are categorized into core parts, principle parts, and complementary parts, which apply different sets of originating rules, such as the super-core provision applicable to core parts. The super-core provision provides an RVC calculation option for core parts that focuses on a specific set of components within each core part, as described in Table A.2 of the Automotive Appendix.

The CBP Instructions clarify the super-core provision by providing examples of the pertinent six-digit and ten-digit HTSUS codes applicable to the core parts and components listed in Table A.2 as follows:

Labor Value Content

The LVC provisions are unique to the USMCA, requiring compliance from automobile producers for their vehicles to qualify for USMCA treatment. Because there are no comparable provisions in the NAFTA or any existing free trade agreement, there is no precedent for their interpretation.

As with the RVC provisions, the CBP Instructions carry forward almost the entirety of the LVC provisions from the Automotive Appendix. See Article 7 of the Automotive Appendix. However, while the Automotive Appendix provides a staggered increase of the LVC requirement for passenger vehicles that goes from 30 to 40 percent over three years, the CBP Instructions only address the increase from 30 to 33 percent after one year.

Otherwise, the CBP Instructions follow and supplement the Automotive Appendix by clarifying definitions and providing detailed calculation methodologies. This includes the same LVC requirements for light trucks and heavy trucks, such as the RVC credit derived from excess LVC with respect to heavy trucks.

The newly defined terms from the CBP Instructions include the following:

• Advanced battery packs
• Annual purchase value (APV)
• High-wage assembly plant for passenger vehicle or light truck parts
• High-wage assembly plant for heavy truck parts
• High-wage labor costs (HWLC)
• High-wage material
• High-wage technology expenditures
• High-wage transportation or related costs for shipping
• Qualifying wage-rate vehicle assembly plant
• Qualifying wage-rate production plant
• Total vehicle plant assembly purchase value

These above terms mainly supplement Article 7(3) of the Automotive Appendix, clarifying terminology, such as high-wage material or manufacturing expenditures (HWME), high-wage technology expenditures (HWT), and high-wage assembly expenditures(HWA). Through these new terms, these implementing instruction establish two LVC calculation methodologies – (1) Net Cost (NC); and (2) Total Vehicle Plant APV – as follows:

(1) Net Cost:

LVC    =          HWLC (if elected) + HWME + HWT + HWA          x 100
NC + HWLC (if elected)

(2) Total Vehicle Plant APV:

LVC    =          HWLC (if elected) + HWME + HWT + HWA          x 100
Total APV + HWLC (if elected)

Similarly, details for calculating the inputs within these above formulas are further elaborated within the CBP Instructions, which include methods for aggregating transportation costs and materials related to HWME.

The CBP Instructions further supplement the application of LVC averaging by adding a fifth LVC averaging category that permits averaging all vehicles produced in one or more plants in the territory of a USMCA country. It also provides new details on the method of selecting one of these LVC averaging categories from Article 7(4) of the Automotive Appendix.

Steel and Aluminum Purchase Requirements

The steel and aluminum content requirements are also unique to the USMCA, requiring at least 70% of the vehicle producer’s purchases of steel and aluminum to be originating for qualification of the vehicle under the USMCA. The CBP Instructions expand on Article 6 of the Automotive Appendix by providing a list of the steel and aluminum components that are subject to this requirement:

• Classification of steel products subject to this requirement include:  7208.25; 7208.26; 7208.27; 7208.36; 7208.37; 7208.38; 7208.39; 7208.51; 7208.52; 7208.53; 7208.54; 7209.15; 7209.16; 7209.17; 7209.18; 7209.25; 7209.26; 7209.27; 7209.28; 7210.90; 7211.14; 7211.19; 7211.23; 7212.30; 7225.40; 7225.50; 7225.99; 7226.91; 7226.92; 7226.99; 7306.30; 7306.50; 7306.61; 7306.69; ex. 8708.29; and ex 8708.99

• Classification of aluminum products subject to this requirement include:  7601.10; 7601.20; 7604.10; 7604.21; 7604.29; 7606.11; 7606.12; 7606.91; 7606.92; 7608.10; 7608.20; ex. 8708.29; and ex 8708.99

Alternative Staging Regime

Similar to the sections above, the CBP Instructions follow the transition period outlined in Article 8 of the Automotive Appendix, as well as the alternative staging regime that may be applied to passenger vehicles and light trucks. It further notes that the USTR will publish guidance for the alternative staging regime in the federal register.

The procedures for applying for the use of the alternative staging regime were published in the Federal Register on April 21, 2020. These applications are due by August 31, 2020, and details on this application can be found here.

Vehicle Producer Recordkeeping Requirements

In addition to the recordkeeping requirements denoted above, any vehicle producer, whose good is the subject of a claim for preferential tariff treatment under the USMCA, must keep records and supporting documents related to the LVC and steel and aluminum purchasing requirements.

The vehicle producer must retain these records for a period of five years and render them for examination and inspection upon request. It is anticipated that the US Department of Labor will issue regulations addressing in more detail recordkeeping requirements related to the high-wage components of the LVC requirements.

Read The Full Analysis Here: CBP Takes First Step Towards Full USMCA Implementation