Rules of origin, the issue that continues to give North America a headache

Wednesday, August 4, 2021

The T-MEC region is one of the largest commercial regions in the world, becoming an example of economic development and commercial integration between economies as diverse as Mexico, the United States and Canada.

Despite the good results that have been seen since its signing, there is an issue that causes disputes between the 3 member countries: the “rules of origin”.

The main objective of this topic is to unify the amount of material originating in the region to promote local supply in the region.

Which is the controversy with the “rules of origin”?

The renewal of the free trade agreement suggested a higher percentage of the amount of material in the products to be able to have tariff preferences, which covers various industries in which the countries are part of the production.

The current problem is the automotive sector one of the main among the 3 countries.

The recent discussion of the rules of origin in automotive matters among the countries is because the United States Trade Representation has interpreted the provisions of the treaty differently.

Given the negative position of the United States to modify its interpretation of the rules of origin of the automotive industry; Mexico and Canada seek to file a dispute panel to defend what was agreed in the framework of the T-MEC, and thereby average 75% in the essential parts to comply with the regional content.

To understand the problem of interpretation by the United States, we will explain the situation:

In the automotive industry there are 7 essential parts in electric cars and 6 in combustion cars, since the batteries are removed, and the auto parts must meet an average of 75% regional content (TE-MEC), some may be above or below, but the average of all must meet 75%, this is called Super Core part.

Under what is agreed by the negotiators, if the average 75% is met, it is allowed to take 100% of the content in the vehicle, which is called roll up, which is the possibility of taking 75% to 100 percent. The problem here is that the United States says there is no roll up, which is where the different interpretation between the parties came in.

The United States maintains that only the value corresponding to that 80% of the door should be added (not 100%) in the amount that is required to comply with the total regional content of the exported car; But the agreements were very clear in the treaty to avoid this type of conflict, for which Mexico, Canada and even the companies located in the United States cannot explain the difference in interpretation by the United States government.

Consequently, Mexico and Canada plan to hold a dispute settlement panel against the United States in the free trade agreement between the three (T-MEC).

The automotive sector is the most integrated in North America, with intraregional exports of 236,000 million dollars in 2020. Despite the big drop in the markets due to COVID19. For this reason, it is a primary issue at the negotiating table between the 3 countries since failure to reach an agreement will greatly affect capital investment, as well as in the supply chains of the large automotive assembly companies.

In addition, in 2021, the year of “recovery”, it is important to be able to resolve these differences of interpretation to re-generate the necessary conditions for favorable growth that allows reaching the levels of 2019 and recovering the lost market. In the first instance, wait for the United States to reconsider its interpretation and take as a second option in a conflict panel where objective actors will intervene at the negotiating table and avoid at all costs affecting trade facilitation in this region.