Uniform Regulations Detail U.S.-Mexico-Canada Agreement's Rules of Origin

Uniform Regulations Detail U.S.-Mexico-Canada Agreement's Rules of Origin

June 15, 2020, Covington Alert

Eagerly awaited rules spell out automotive and textile and apparel obligations and pave the way for USMCA’s entry into force on July 1, 2020

On June 3, 2020, the Office of the U.S. Trade Representative (“USTR”) released the Uniform Regulations elaborating on the rules of origin in the United States-Mexico-Canada Agreement (“USMCA”). As the USMCA is slated to enter into force on July 1, 2020, the Uniform Regulations reflect the three parties’ consensus on how the agreement’s rules of origin should be interpreted, applied, and administered, especially as relevant to the automotive and textile and apparel industries. Similar to the North American Free Trade Agreement (“NAFTA”) Regulations that were negotiated by the parties, the USMCA’s Uniform Regulations provide additional definitions and illustrative examples that demonstrate how the rules are applied and are aimed to help ensure consistent and uniform treatment of the rules among the parties. In the United States, U.S. Customs and Border Protection (“CBP”) will amend Title 19 of the Code of Federal Regulations to implement the USMCA and Uniform Regulations. Until those regulations are promulgated, “Interim Implementing Instructions” issued by CBP on April 16, 2020, provide temporary guidance.

The Uniform Regulations bring further specificity and clarity to several key USMCA obligations, while its silence in other areas is also notable. In regard to automotive rules of origin, the Uniform Regulations provide additional calculation rules and examples for use in complying with regional value content requirements, along with more precise steel and aluminum purchasing requirements. The Uniform Regulations do not, however, provide additional illustrative examples for the labor value content requirements and the labor certification requirements. Nor do the Regulations help shed additional light on the status of the NAFTA Marking Rules, which CBP will continue to enforce for now, though generally not as a condition for preferential treatment under the USMCA.

Below, we explain the background and structure of the Uniform Regulations and provide an overview of country of origin under the USMCA. We then explore key substantive topics—textile and apparel rules of origin, automotive rules of origin, labor value content rules, and steel and aluminum purchasing requirements—along with procedural and implementation-related elements of the Uniform Regulations. In closing, we highlight policy considerations surrounding implementation of the USMCA and Uniform Regulations.

Background and Overview of the Uniform Regulations

On November 30, 2018, the United States, Mexico, and Canada concluded the USMCA, which aimed to update and modernize NAFTA. Signed on the sidelines of the G-20 in Buenos Aires, the trade deal was meant to send policy signals of continued U.S. engagement in the Western Hemisphere and the strong bonds among the three countries. Though negotiations were often difficult, the USMCA subsequently became the most broadly supported trade deal in Congress in decades (89-10 in the Senate; 385-41 in the House), due in part to support from key labor unions.

As amended in December 2019, several chapters of the USMCA set forth rules of origin and related procedural matters. Rules of origin govern how products qualify as originating from the three countries for purposes of enjoying preferential tariff treatment. The relevant USMCA chapters are those governing Rules of Origin (Chapter 4), Origin Procedures (Chapter 5), Textiles and Apparel (Chapter 6), and Customs Administration and Trade Facilitation (Chapter 7). In Chapter 5, the three parties additionally agreed that prior to the USMCA’s entry into force on July 1, 2020, they would “adopt or maintain through their respective laws or regulations, Uniform Regulations” concerning the new agreement’s rules of origin.[1]

Structurally, the Uniform Regulations are comprised of two documents. The “Origin Procedures” document[2] is shorter, consisting of a preamble and the procedural provisionsrelated to USMCA Chapters 5, 6, and 7. The “Rules of Origin” document is extensive and consists of twenty sections divided among six Parts, along with several appended tables and schedules. The Parts are as follows:

• Part I covers definitions and currency (Sections 1-2);
• Part II covers rules of origin (Sections 3-6);
• Part III covers regional value content rules (Section 7);
• Part IV covers rules governing materials for purposes of the rules of origin (Section 8);
• Part V, entitled “General Provisions,” covers accumulation, transshipment, and non-qualifying operations (Sections 9-11); and

• Part VI, entitled “Automotive Goods,” contains rules of origin specific to vehicles and automotive parts, including rules governing labor value content and regional value content (Sections 12-20).[3]

The Uniform Regulations are slated to take effect together with the USMCA on July 1, 2020.[4] As explained further below, the Uniform Regulations provide key definitions, formulas, illustrative examples, and additional clarity in many areas, including rules of origin specific to the automotive sector and the calculation of regional value content for duty preference claims. There are, however, a few areas that are not addressed in the Uniform Regulations, including additional illustrative examples for the labor value content requirements and the labor certification requirements, which are expected to be issued by the U.S. Department of Labor.

USMCA Country of Origin Overview

In order to qualify for duty-free treatment under the USMCA, goods imported into the United States must conform with the Rules of Origin set forth in Chapter 4 of the USMCA. Imported goods that “originate” in Canada or Mexico and that otherwise meet USMCA requirements are given preferential treatment. In the relatively more straightforward cases, products can qualify as “originating” if they are wholly obtained or produced in the territory of a party,[5] or produced in the territory of a party exclusively from originating materials.[6] Otherwise, products must satisfy product-specific rules of origin, including requirements that operations in the territory of USMCA parties result in a change in a product’s tariff classification (a “tariff shift”) and/or requirements governing the regional value content imparted by those operations.[7] As they were under NAFTA, these product-specific rules of origin under USMCA are complex. Perhaps nowhere is this more true than for automotive products and textiles and apparel, addressed separately below.[8] Here, we first provide an overview of key issues relating to country of origin under USMCA.

Marking Rules and Preferential Treatment

Unless a specific exception applies, all goods imported into the United States must be marked with their country of origin.[9] NAFTA’s Annex 311 authorized the parties to promulgate NAFTA Marking Rules applicable to goods imported under NAFTA.[10] The NAFTA Marking Rules were separate from the NAFTA Origin Rules, which determined whether imported merchandise was eligible for preferential treatment as originating merchandise.[11] Under NAFTA, a good had to both qualify to be marked as a good of Canada or Mexico and meet the product-specific rule of origin in order to qualify for preferential NAFTA treatment.[12] Under USMCA, except for certain agricultural products, a product need only meet the product-specific rule of origin in order to receive preferential treatment.[13]

An open question is whether CBP’s separate marking rules for products from Canada and Mexico will disappear once the USMCA goes into effect. Presumably they will, as they were promulgated under NAFTA Annex 311. So far, however, CBP has given no indication that this will happen. In the Interim Implementing Instructions for the USMCA issued on April 20, 2020, CBP stated simply that “[t]he rules of origin contained in 19 CFR Part 102 determine the country of origin for marking purposes of a good imported from Canada or Mexico.”[14] At least for now, then, the NAFTA Marking Rules of 19 C.F.R. Part 102 still apply.

Marking Rules and Trade Remedy Duties

Another open question is whether any updated USMCA marking rules would have an impact on country of origin for trade remedy duties. In 2018, CBP clarified that an imported good could have one country of origin for NAFTA marking purposes and a different country of origin for purposes of trade remedies, including tariffs imposed under Section 201, 232, and 301.[15] For example, in HQ H300226, CBP determined that the country of origin of an electric motor was Mexico for purposes of marking under NAFTA, but that the country of origin was China for purposes of applying Section 301 duties.^[16] Thus, although the electric motor was to be marked as Mexican origin under the NAFTA Marking Rules, Section 301 duties, which apply only to imports from China, still had to be paid. As mentioned above, it is still unclear whether the separate NAFTA Marking Rules will be applicable under USMCA and whether there will continue to be situations where a product would be subject to Section 301 duties and also marked as made in Mexico or Canada.

Marking Rules and “Sets”

The USMCA clarifies that most goods classified as “sets” under General Rule of Interpretation 3, Harmonized Commodity Description and Coding Systems (“HS” or “Harmonized System”) can be marked with a single country of origin even if up to 10% of the components do not originate in that country.^[17] If more than 10% of the components are non-originating, the good must be marked with multiple countries of origin. Previously, under CBP’s NAFTA marking regulations, sets had to be marked with “the country or countries of origin of all materials that merit equal consideration for determining the essential character of the good.”^[18] The new rule, while subject to certain exceptions, gives importers more certainty as to how sets should be marked with the country or countries of origin.

Textile and Apparel Rules of Origin

The Uniform Regulations provide further guidance on the treatment of various textile and apparel products. They establish a de minimis rule for non-originating materials, whereby a good will be treated as originating in the USMCA territory if the total weight (and not value) of the non-originating materials is 10% or less of the total weight of the good and the foreign elastometric content does not exceed 7% of the total weight.[19] For textile products falling within HS Chapters 50 through 60, if the classification-determinative component of the good is a blend, then “all yarns and fibers used in the production of the component must be taken into account in determining the weight of fibers and yarns in that component.”[20] For textile products falling within HS Chapters 61 through 63, special interpretive rules in Schedule I of the Uniform Regulations govern analysis of the classification-determinative component, and materials not part of that component are disregarded for origin purposes.[21] USMCA’s textile and apparel rules of origin are some of the most complex, and a full explication is beyond the scope of this alert.

Automotive Rules of Origin

The automotive rules of origin are the most complex rules in the USMCA and represent an inflection point for the structure and regulation of the automotive sector’s supply chains in North America. An Appendix to the USMCA’s Rules of Origin Chapter sets forth rules of origin specific to automotive goods,[22] and the Uniform Regulations have added further detail to this Appendix. The primary classifications of automotive goods are passenger vehicles, heavy trucks, and light trucks.[23] Key differences between NAFTA and USMCA for automotive rules include new phased-in net cost thresholds for Regional Value Content (“RVC”), updated rules for advanced technology vehicles, and new Labor Value Content rules.

Methods of Calculating Regional Value Content

RVC is a measure of the percentage of a product’s value derived from materials originating from the territory of the USMCA parties. RVC rules are particularly important to automotive goods, as they often apply in lieu of or in tandem with tariff shift rules (which are generally less difficult to satisfy) in determining whether a good qualifies as originating.[24] In general, the USMCA rules permit RVC to be calculated under either the transaction value method or the net cost method.[25] However, under the general rule, the net cost method may only be used if the product-specific rules in Annex 4-B do not provide a rule based on the transaction value method.^[26] In the case of certain automotive goods, the rules specifically mandate the use of the net cost method.[27]

Net Cost Method for Passenger Vehicles and Light Trucks

The USMCA sets forth definitions of passenger vehicles and light trucks, as well as more stringent RVC minimum thresholds for each to qualify as originating. “Passenger vehicles” are defined as vehicles classified in HS subheadings 8703.21 through 8703.90, with the exceptions of 1) vehicle with a compression-ignition engine classified in subheadings 8703.31 through 8703.33; 2) vehicles of subheading 8703.90 with both a compression-ignition engine and an electric motor for propulsion; 3) three- or four-wheeled motorcycles; 4) all-terrain vehicles; 5) motorhomes or entertainer coaches; 6) ambulances; 7) hearses; and 8) prison vans.^[28] A “light truck” is defined as a vehicle of subheading 8704.21 or 8704.31, except for a vehicle that is solely or principally for off-road use.[29]

Under NAFTA, the RVC requirement for passenger vehicles and light trucks was 62.5% RVC.[30] Under USMCA, unless the importer is operating under an approved alternative staging regime, the RVC requirement for passenger vehicles and light trucks is:

(a) 66% under the net cost method from July 1, 2020 to June 30, 2021;

(b) 69% under the net cost method from July 1, 2021 to June 30, 2022;

(c) 72% under the net cost method from July 1, 2022 to June 30, 2023; and

(d) 75% under the net cost method, from July 1, 2023, onwards.^[31]

Net Cost Method for Heavy Trucks

Similarly, the USMCA sets forth a definition of heavy trucks and updated RVC minimum thresholds. Under USMCA, a “heavy truck” is a vehicle of subheading 8701.20, 8704.22, 8704.23, 8704.32, 8704.90, or a chassis fitted with an engine of heading 87.06 that is for use in a vehicle of subheading 8701.20, 8704.22, 8704.23, 8704.32 or 8704.90, except for a vehicle that is solely or principally for off-road use.[32] Under NAFTA, the RVC requirement for light trucks was 60% RVC.[33] Under USMCA, unless the importer is operating under an approved alternative staging regime, the RVC requirement for heavy trucks is:

(a) 60% under the net cost method from July 1, 2020 to June 30, 2024;

(b) 64% under the net cost method from July 1, 2024 to June 30, 2027;

(c) 70% under the net cost method from July 1, 2027, onwards.^[34]

RVC Requirements for Automotive Parts

As to passenger vehicles and light trucks, the Automotive Goods Appendix to Chapter 4 of the USMCA prescribes RVC requirements for enumerated “core parts,” “principal parts,” and “complementary parts,” a new segmentation not present under NAFTA.[35] “Super-core parts” enumerated in Table A.2 are treated as a single part for RVC purposes;[36] moreover, a passenger vehicle or light truck is originating only if such “super-core parts” are originating.[37] Similarly, as to heavy trucks, the Automotive Goods Appendix prescribes RVC requirements for enumerated “principal parts” and “complementary parts.”[38]

Elaborating on the framework established by the USMCA, the Uniform Regulations prescribe RVC calculation methods for various types of automotive parts based primarily on whether the part is original equipment or an aftermarket part.[39] In general, the RVC calculation methods applicable to original equipment parts mirror those applicable to the vehicles into which the parts are incorporated—passenger vehicles and light trucks, on the one hand, or heavy trucks, on the other. The minimum net cost thresholds change based on time horizons, as described above.[40] Aftermarket parts, by contrast, must generally satisfy a singular minimum RVC requirement, generally 50 or 60% under the net cost method, which does not vary over time.[41] The Uniform Regulations also provide modified versions of the various tables enumerating automotive parts originally appended to the USMCA’s Automotive Goods Appendix, and elaborate on the RVC requirements applicable to those enumerated parts of passenger vehicles and light trucks[42] and parts of heavy trucks.[43]

Notably, the USMCA recognized that an emerging area of automotive goods regulation relates to Advanced Technology Vehicles, defined to include electric, hybrid, fuel cell, or other advanced propulsion vehicles.[44] The parties contemplated further development of tailored requirements in this area.[45] Although Advanced Technology Vehicles are not treated as a separate class of vehicles separate from passenger vehicles, light trucks, and heavy trucks, the Uniform Regulations afford certain flexibilities for particular Advanced Technology Vehicle components. For instance, in order to qualify as originating, certain advanced batteries used in electric vehicles may meet either an RVC or tariff shift requirement.[46] Similarly, lithium-ion batteries governed by an alternative staging regime (discussed further below) need only satisfy a tariff shift rule, in lieu of an RVC requirement.[47]

Averaging

As with NAFTA, a producer may use “averaging” to meet its RVC obligations under USMCA.^[48] Averaging allows the producer to use data from its entire fiscal year to calculate the RVC of a particular category of vehicle.^[49] If the producer’s fiscal year begins after July 1, 2020, but before July 1, 2021, the producer may calculate the RVC for the period beginning July 1, 2020 and ending at the end of the following fiscal year. To do this, a producer must notify CBP by July 31, 2020, and it must notify CBP again at least 10 days before the first day of its fiscal year. In electing averaging, the vehicle producer must state information regarding the “passenger vehicle, light truck, or heavy truck” subject to averaging, and once elections have been made, the producer cannot change the “category of passenger vehicles, light trucks, or heavy trucks.”[50] The foregoing disjunctive formulation (“or”) may have prompted initial concerns from the American Automotive Policy Council (“AAPC”) that, in contrast to NAFTA, the Uniform Regulations may not permit companies to average RVC across light and heavy trucks; subsequently, AAPC received confirmation from the Administration that averaging in this manner would be permissible.[51]

Roll Up

The USMCA also contains a special “roll up provision” aimed at limiting the practice of using non-USMCA components to manufacture USMCA parts, then using the value of the entire part in the RVC calculation. The provision states that “[th]e value of non-originating materials used by the producer in the production of a passenger vehicle, light truck and parts thereof must not, for the purpose of calculating the RVC of the good, include the value of non-originating materials used to produce originating materials that are subsequently used in the production of the good.”^[52] The value of non-USMCA components must be subtracted from the value of the part when calculating RVC, thereby strengthening the RVC provisions and making it more difficult to establish originating status then was the case under NAFTA.

Labor Value Content Rules

As addressed in our previous client alert regarding the USMCA labor provisions, the USMCA contains a new and unprecedented Labor Value Content (“LVC”) rule.[53] The LVC requirements and the related enforcement mechanisms (including the Facility-Specific Rapid Response Labor Mechanism) account in large part for why the USMCA garnered so much bipartisan support. In addition to the RVC and product-specific rule requirements, the LVC rules must be satisfied in order for automobiles, including passenger vehicles and light and heavy trucks, to enjoy preferential duty treatment. The LVC rules are complex and include specific percentages of vehicle content that must be manufactured with a minimum hourly wage of US $16 per hour. The intent of this provision is to protect U.S. automobile manufacturing jobs and prevent the shift of manufacturing jobs to lower-wage jurisdictions. For example the LVC for passenger vehicles is phased in over a 3-year period and includes the following requirements:

• On July 1, 2020 a 30% LVC is required with at least 15% high-wage material and manufacturing expenditures, no more than 10% of high-wage technology expenditures and no more than 5% of high-wage assembly expenditures.
• July 1, 2021 a 33% LVC is required with at least 18% high-wage material and manufacturing expenditures, no more than 10% of high-wage technology expenditures and no more than 5% of high-wage assembly expenditures.
• July 1, 2022 a 36% LVC is required with at least 21% high-wage material and manufacturing expenditures, no more than 10% of high-wage technology expenditures and no more than 5% of high-wage assembly expenditures.

• July 1, 2023 a 40% LVC is required with at least 25% high-wage material and manufacturing expenditures, no more than 10% of high-wage technology expenditures and no more than 5% of high-wage assembly expenditures.

The Uniform Regulations provide the formulas for calculating LVC and definitions for critical terms including “high-wage labor costs” (“HWLC”), “high-wage material” (“HWM”) and “high-wage technology.” Formulas are also provided for calculating high-wage technology expenditures credit (“HWTC”), which is a credit for wages paid by the producer for research and development (“R&D”) or information technology (“IT”).

As discussed further below, many automotive manufacturers are seeking alternative staging regimes which could extend the phased-in requirement for LVC from three years to up to five years, depending on the structure of the plan as approved by USTR. The Uniform Regulations do not include illustrative examples for LVC, and the U.S. Department of Labor (“Labor”) has not yet released regulations related to the high-wage components of the labor value content requirements. Additional information related to the Labor Department’s treatment of these components is included in Annexes A and B of the Uniform Regulations.

Steel and Aluminum Purchasing Requirements

The USMCA contains new rules governing the use of steel and aluminum inputs in the automotive sector, a topic not addressed in NAFTA. The Appendix to Chapter 4 of the USMCA provides that in order for a passenger vehicle or light or heavy truck to qualify as originating, during a specified time period, at least 70% of the value of the vehicle producer’s steel purchases and aluminum purchases in the U.S., Mexico, and Canada must consist of originating goods.[54] The parties agreed to “provide in the Uniform Regulations additional description for steel and aluminum subject to” this requirement, as appropriate, along with certification or verification provisions.[55]

The Uniform Regulations expand upon the USMCA’s steel and aluminum rules by specifying the products and transactions subject to the 70% purchasing requirement and permissible calculation methods. Specifically, the Uniform Regulations:

• contain a list of products by HS classification (at the four- and six-digit level) subject to the purchasing requirement;[56]
• clarify that the purchasing requirement applies to purchases made directly by a vehicle producer as well as to those made under contracts negotiated by a vehicle producer, for contracts under which the steel or aluminum is supplied to a parts manufacturer that in turn supplies the finished part to the vehicle producer;[57]
• clarify that the purchasing requirement governs only steel and aluminum purchased for use in manufacturing passenger vehicles, light trucks, or heavy trucks, not other uses such as producing other vehicles, tools, or dies;[58]
• provide that, for steel to be considered originating as of July 1, 2027, all steel manufacturing processes must occur in one or more of the USMCA countries, except for metallurgical processes involving the refinement of steel additives;[59]
• specify permissible valuation methods for steel and aluminum for purposes of the purchasing requirement;[60] and

• require that any vehicle producers using estimates in their calculations conduct an annual end-of-fiscal-year analysis of actual purchases.[61]

These steel and aluminum purchasing requirements will place new data-gathering burdens on vehicle manufacturers and suppliers. Trade associations have indicated that many manufacturers are uncertain about whether they would comply with the 70% rule, as the analysis has never before been required.

The steel and aluminum purchasing requirements should also be understood against the backdrop of U.S. tariff-related proceedings and how side letters to the USMCA sought to ameliorate Canada's and Mexico's concerns about the threat of new U.S. trade restrictions. Steel and aluminum imports from Canada and Mexico were previously targeted by additional national security duties imposed by the United States under Section 232 of the Trade Expansion Act of 1962, before country-wide exemptions for Canada and Mexico took effect. Additionally, Canada and Mexico were concerned by the U.S. Administration's potential imposition of Section 232 tariffs on automobiles and auto parts, following the United States’ finding that such imports threatened U.S. national security. In side letters to the USMCA, the United States agreed to provide a 60-day exemption for both Mexican and Canadian goods after the imposition of any future Section 232 measure, to enable the parties to “seek to negotiate an appropriate outcome.” The United States further agreed to exclude from any future Section 232 actions the following goods: 2.6 million passenger vehicles annually from each Canada and Mexico; all light trucks; and automotive parts of US $32.4 billion and US $108 billion annually from Canada and Mexico, respectively.

Procedural Dimensions and Customs Modernization

The USMCA and the Uniform Regulations include a number of provisions designed to modernize customs administration. For example, Chapter 7 of the USMCA covers a broad range of issues related to Customs Administration and Trade Facilitation. Many of these provisions are the same or similar to the provisions set forth in the Comprehensive and Progressive Agreement for the Trans Pacific Partnership (“CPTPP”). Four topics are especially noteworthy and relate to country of origin procedures governing certificates of origin, transshipment, the minimum threshold for low value goods, and advance rulings. Each is discussed below.

Certification of Origin

The USMCA imposes less stringent requirements for certificates of origin. Specifically, the USMCA eliminated NAFTA’s requirement that certificates of origin be provided on a specific CBP form in order to claim preferential treatment.[62] An importer cannot continue to rely on its NAFTA certificates after the USMCA’s entry into force on July 1. Under the USMCA’s more liberal approach, an importer may submit a certification by the importer, exporter, or producer that contains a minimum set of data elements.[63]

Under CBP’s Interim Implementing Instructions, there are instructions for general certifications as well as certifications for LVC and RVC.[64] For example, proper LVC certification requires the CBP certification described above that explains how the vehicle meets the LVC requirements, as well as a certification to the U.S. Department of Labor regarding the high-wage components of the LVC requirement.[65]

Transshipment’s Effect on Originating Status

The USMCA and the Uniform Regulations provide greater clarity on what operations a good may undergo when transshipped without losing originating status, and the types of documentation that may be relied upon to secure preferential treatment. Under NAFTA, a good is not considered originating within the territories of the parties, “if, subsequent to that production, the good undergoes further production or any other operation outside the territories of the Parties, other than unloading, reloading or any other operation necessary to preserve it in good condition or to transport the good to the territory of a Party.”[66] The USMCA and the Uniform Regulations explicitly allow a good to retain its originating status, even if it is transported outside the geographic territory of the United States, Mexico, or Canada, as long as it remains under customs control and is not subjected to further production or significant operations while outside of that regional territory.[67] Therefore, USMCA’s text includes the requirement, which had been codified at CBP’s NAFTA regulations, that goods remain in customs control while outside of the regional territory.[68] The Uniform Regulations include examples of insignificant operations that would not deprive a good of its originating status. The list is nearly identical to CBP’s NAFTA regulations, but adds “separation from a bulk shipment; storing; labeling or other marking required by the importing USMCA county.”[69] In addition, the USMCA retains the exceptions in CBP’s NAFTA regulations that the requirements to retain originating status do not apply to certain electrical machinery and related parts under particular tariff provisions, so long as the further production or operation that occurs outside of the territory of the USMCA parties does not change the excluded goods’ tariff classification to a subheading outside of the product’s group.[70]

An importer may be required to establish, through documentation, that a good meets these requirements and should retain its originating status.[71] The USMCA explains that an importer may establish that a transshipped good retains its originating status by providing “relevant documents, such as in the case of storage, storage documents or a copy of the customs control documents, demonstrating that the good remained under customs control while outside the territories of the Parties.”[72] Although CBP’s NAFTA regulations similarly allowed an importer to submit customs controls documents that “satisf[ied]” a Center director “that the good remained under customs control,” those previous regulations did not contemplate the submission of storage documents.[73] If a USMCA good is determined to be non-originating by reason of transshipment, the entire good is considered non-originating and therefore would lose its duty preferential status.[74]

Duty- and Tax-Free Treatment of Certain Low Value Goods

The USMCA sets forth specific provisions related to low value express shipments, e.g., parcels delivered by courier or express mail. Eligible shipments face minimal documentation requirements and are afforded expedited treatment.[75] Such shipments are not subject to customs duties, taxes, or formal entry procedures, so long as they fall below the following values: US $800 for customs duties and taxes on shipments entering the United States, US $117 for customs duties and US $50 for taxes on shipments entering Mexico, and C $150 for customs duties and C $40 for taxes on shipments entering Canada.[76] These so-called de minimis thresholds represent increases for Mexico and Canada, but not for the United States. Although the United States’ threshold is higher by comparison, the United States has the flexibility to impose a lower de minimis threshold on Canada or Mexico on the basis of reciprocity.[77] Whether the United States will take advantage of this option remains to be seen, but companies that utilize express shipments should monitor this issue. Moreover, the parties are generally required to adopt procedures to apply fewer customs formalities on shipments under C $3,300 on those entering Canada and under US $2,500 on those entering the United States and Mexico.

Expanded Scope of Advance Rulings

The USMCA requires each party to issue advance (pre-importation) rulings for particular issues and sets forth procedural requirements for such rulings. The USMCA expands the scope of advance rulings by requiring the parties to provide advance rulings for classification, valuation, origin, and tariff-rate quota applicability.[78] Customs administrations now must provide a full explanation of the reasons to any person requesting an advance ruling, not just to those adversely affected by a ruling, and must issue the rulings within 120 days after the relevant customs administration has received all of the necessary information.[79] Unless modified or revoked, the advance rulings are effective on the date of issuance.[80] NAFTA rulings are no longer applicable to a USMCA product, meaning a company may need to evaluate whether to request a new ruling under the USMCA.

The Uniform Regulations shed further light on the advance rulings provision. Before a customs authority can decline to further process an application for an advance ruling, it must notify an applicant of the deficiency and give the applicant an opportunity to cure the deficiency.[81] The Uniform Regulations also clarify that an applicant may re-apply for an advance ruling.[82] Finally, parties are required to maintain advance rulings online and update their websites every quarter with all advance rulings issued.[83] This online publication requirement is new and important, given the USMCA’s requirement that identical facts and circumstances should be treated the same in different advance rulings.[84] Thus, these protections should help establish a fair application process and minimize uncertainty for foreign manufacturers, foreign exporters, and importers.

Implementation and Alternative Staging Regimes

Aware of the importance of ensuring compliance, in late March, both the U.S. and Mexican automotive industries requested a delay in the implementation of the rules of origin, citing the fact that the Uniform Regulations had yet to be released and the supply chain disruption caused by the global COVID-19 pandemic. Subsequently, the USMCA implementation date was delayed from June 1 to July 1, 2020, after the three parties missed a deadline for notifying their compliance with the agreement’s obligations. Following the implementation date, CBP will promulgate new Title 19 regulations to provide additional guidance on how to comply with USMCA requirements under U.S. law. In the meantime, until those regulations are promulgated, “Interim Implementing Instructions” issued by CBP on April 16, 2020, provide temporary guidance.[85]

Additional Time and Flexibility for Records

Under the Uniform Regulations, producers, exporters, and importers are provided additional time to respond to requests seeking information, such as certification of origin, for the period from July 1 through December 31, 2020. This delayed documentation rule applies to passenger vehicles, heavy trucks, other vehicles, and parts used in the production of such vehicles.[86]

Alternative Staging Regimes

Additionally, the U.S. Administration provided automakers with a path to extending their compliance timeline through publication of a notice of procedures for producers of passenger vehicles and light trucks to petition to use an alternative to the USMCA’s standard staging regime for rules of origin requirements.[87] These alternative staging plans can help ease the transition to USMCA’s new rule of origin requirements for vehicle producers that are unable or unlikely to be able to meet these requirements upon the USMCA’s entry into force. Under USTR’s notice, petitions must be filed by July 1. If there are deficiencies in the petition or if the automotive manufacturer intends to modify the alternative staging plan, it must submit a modified plan by August 31.

Through an approved alternative staging plan, the importer of the vehicles could claim preferential tariff treatment under the USMCA, even though the vehicle would not otherwise satisfy the USMCA’s new requirements. A vehicle producer could benefit from a lower minimum regional value content percentage, lower minimum labor value content percentage, and an exemption from the core parts requirement. The minimum thresholds for vehicles to be approved for an alternative staging plans are: (1) an RVC of at least 62.5 percent under the net cost method, (2) specific RVC thresholds for parts listed under Table A.1 except lithium ion batteries, (3) at least 70 percent of the vehicle producer’s purchases of steel and aluminum, by value, must satisfy the rules of origin under Schedule I, unless specifically exempt in the alternative staging plan, and (4) an LVC of 25 percent, dispersed across specific categories for high-wage material and manufacturing expenditures, high-wage technology expenditures, and high-wage assembly expenditures.[88] Importantly, vehicles covered by approved alternative staging plans are exempt from the core parts requirement.[89] An approved alternative staging plan could be valid for five years until June 30, 2025, i.e., approximately two years longer than the standard staging regime, and has the potential to be extended.[90] A successful petition must include a detailed and credible plan to meet the USMCA’s rules of origin requirements for each vehicle model.

There are key limitations to the scope of alternative staging regimes. One key limitation is that a producer’s eligibility for alternative staging is limited to 10 percent of production. In addition, a petition granted by USTR entitles a producer to use the alternative staging regime for imports to the United States; however, a producer that seeks to secure the staging benefit in Canada and Mexico must separately submit alternative staging plans to the Canadian and Mexican authorities. Moreover, there are several complexities associated with the alternative staging regimes, including having to establish detailed and credible plans for each vehicle model for which an alternative regime is requested; an ongoing duty to notify the government of material changes to the alternative regime; and providing the government with detailed information about assembly capacity, production, sales, and usage of steel and aluminum.

An alternative staging plan has the potential to secure the competitive advantage of preferential tariff treatment for a producer that may face difficulties satisfying the USMCA’s standard transition timetable and criteria by July 1. Many vehicle producers have faced challenges with implementation of the USMCA rules of origin, and these challenges have been exacerbated by the COVID-19 crisis, which has not only disrupted supply chains in Mexico but also temporarily suspended some manufacturing in the United States. Depending on whether an automotive manufacturer is following the standard staging or an alternative staging regime, it will need to coordinate with suppliers and routinely monitor supply chains to confirm that vehicles meet the requisite standards before claiming preferential duty treatment. Vehicle parts manufacturers should be working closely with their clients to fully understand approved staging plans so they can begin to prepare for eventual implementation and enforcement.

Policy Analysis

The USMCA and the Uniform Regulations reaffirm the vitality of the North American economy and send an important signal in the context of increasing U.S.-China tensions and deliberations over supply chain relocation. This is particularly important for the U.S. and Mexican Administrations as both countries are particularly hard hit by COVID-19. And as U.S. tariffs on Chinese goods may remain in place for the foreseeable future, Mexico could stand to benefit if U.S. companies opt to relocate supply chains from China and invest closer to home.

Enforcement of the USMCA will be a priority for the U.S. Administration, given that it forged domestic support for the trade accord in part based on the argument that it would be more readily enforceable, especially as to labor standards. Some observers predict that audits may be more prevalent early on, as CBP and automakers exchange information and define the contours of the new rules through their implementation.[91] However, given that the Uniform Regulations were only just released, some observers expect that enforcement efforts will not commence on July 1, at least with respect to rules of origin. The parties, however, have yet to authorize such broad-based delayed enforcement. Moreover, many automakers are expected to submit alternative staging plans and benefit from a longer transition period.

Finally, the USMCA and the Uniform Regulations represent a significant development in U.S. free trade agreements more broadly. Although the Uniform Regulations’ level of detail may not be transferrable to other negotiations and trading partners, it remains to be seen whether the United States will seek to apply in future trade talks certain new regulatory requirements such as labor value content and steel and aluminum purchasing rules.

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Covington’s diverse trade policy team in Washington, which include former senior government officials, are uniquely positioned to provide thoughtful strategic advice to clients seeking to monitor, prepare for, and react to the evolving USMCA developments. We count among our ranks:

• Shara Aranoff, former Commissioner and Chairman of the U.S. International Trade Commission;
• Kimberly Breier, former Assistant Secretary in the Bureau of Western Hemisphere Affairs at the U.S. Department of State;
• Ambassador Gerónimo Gutiérrez Fernández, former Mexican Ambassador to the United States and former Deputy Secretary for Governance and Homeland Security;
• Alan Larson, former Under Secretary of State for Economic, Business and Agricultural Affairs;
• Cindy Owens, former attorney in the Office of Regulations and Rulings, U.S. Customs and Border Protection; and

• John Veroneau, former Deputy USTR and former USTR General Counsel.

If you have any questions concerning the material discussed in this client alert, please contact the members of our International Trade and Public Policy practices below.