Mexico and Canada win automotive panel over the U.S.

Mexico and Canada won a dispute settlement panel against the United States over rules of origin in the automotive sector under the Free Trade Agreement between the three countries (T-MEC).

The Panel constituted under the Agreement between Mexico, the United States, and Canada (T-MEC), released the Final Report of the United States-Rules of Origin in the Automotive Sector dispute (USA-MEX-2022-31-01).

According to its ruling, the Panel determined that the T-MEC allows vehicle manufacturers to consider the essential parts of a finished vehicle (engine, transmission, body, etc.) as originating once, separately, such auto parts have complied with the minimum percentage of regional content (75%), using the alternative methodologies established by the same treaty.

“In the coming days, Mexico will initiate a process of dialogue and cooperation with its trading partners to address the Final Report,” said the Ministry of Economy in a press release.

Previously, most analysts considered that the United States would lose the ruling, as well as the main non-U.S. capital auto manufacturing companies established in North America.

In the process of the dispute, the Mexican and Canadian delegations focused mainly on defending the use of “roll-up” methodologies, while the U.S. delegation opposed this with respect to certain parts incorporated into finished vehicles, with the intention of limiting the use of foreign content in automotive production exported regionally.

The dispute settlement case is important for all three countries because the automotive sector comprises the largest flow of intra-regional trade, and also because new provisions of the T-MEC are being tested to resolve disputes between the parties.

Roll-up methodologies allow materials (e.g., automotive parts) that have acquired origin by meeting a regional value content (RVC) threshold to be considered fully originating when used as inputs into a subsequent manufactured product (“finished vehicle”).

Roll-up methodologies provide additional flexibility for producers of finished products to satisfy the applicable TRQ and therefore obtain preferential tariff treatment.