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1 1 (December 8, 2023)

handle is hein.crs/govenqu0001 and id is 1 raw text is: Congressional Research Service S Informing the IegRIltve debate since 1914 USMCA: Automotive Rules of Origin The United States-Mexico-Canada Agreement (USMCA; P.L. 116-113) entered into force on July 1, 2020, replacing the 1994 North American Free Trade Agreement (NAFTA). NAFTA was viewed as instrumental in creating a highly integrated North American motor vehicle industry. USMCA negotiations over new rules for North American automotive trade created tensions among and within the three trading partners. Some uncertainty remains over the implementation of the automotive trade rules and potential impacts on the North American motor vehicle industry. Congress has an oversight role in USMCA implementation and U.S.-North American trade relations. Autorotive Ruies of Origin The criteria used to determine the national origin of a product are called rules of origin (ROO). Most free trade agreements (FTAs) have ROO provisions to determine which goods traded between member countries are eligible for preferential treatment (reduced tariffs or duty-free trade). They generally seek to ensure that the benefits of the agreement are granted to goods primarily produced by a member country (and therefore subject to the entirety of its commitments) rather than to goods made wholly, or in large part, in other countries. NAFTA phased out tariffs on automotive products traded among the three member countries as long as the products met the ROO, particularly regional value content (RVC) requirements (i.e., a certain percentage of North American content). USMCA maintains these tariff eliminations, but tightens the ROO, as shown in Table 1. During the negotiations, motor vehicle and parts producers generally supported retaining NAFTA ROO. The Trump Administration and labor advocates sought to require higher wages and RVC thresholds, which they argued would incentivize manufacturing in the United States. Some economists contend that the higher RVC requirements in USMCA may have unintended consequences. For example, they state that it may be more cost efficient for manufacturers to pay the 2.5% U.S. most-favored nation (MFN) tariff on passenger vehicles rather than meet the extensive ROO requirements. They argue that the new rules pose a risk to North American auto production because they may raise production costs, resulting in higher vehicle prices, reduced demand for motor vehicles, and fewer auto exports, as well as incentivize more automation in automotive production, thereby reducing demand for workers. Even with these concerns, some motor vehicle producers support USMCA and say that complying with the new ROO may be challenging, but probably manageable. Entry into Force an d E conomki Irmpact USMCA provided a three-year transition period for the new automotive ROO. It also allowed vehicle producers to request an alternative staging regime that would permit a Updated December 8, 2023 longer transition period to implement the new ROO (up to five years after USMCA's entry into force, unless a request for a longer period is granted). The Office of the U.S. Trade Representative (USTR) approved alternative staging requests from 13 companies. Table 1. NAFTA and USMCA Automotive ROOs NAFTA USMCA 62.5% RVC for passenger 75% RVC for passenger vehicles, light trucks, vehicles, light trucks, core auto engines and transmissions parts 60% RVC for other 65%-70% RVC for other vehicles and auto parts vehicles and auto parts No labor value content LVC rule stating that 40%-45% rule (LVC) (no wage of a vehicle's production by requirement) value be made by workers earning at least $16 per hour No steel and aluminum 70% of a vehicle manufacturer's requirement steel and aluminum purchases by value must originate in North America Source: CRS based on USMCA and NAFTA text. According to USMCA implementing legislation (P.L. 116- 113), USTR, in consultation with the Interagency Committee on Trade in Automotive Goods, also established by P.L. 116-113, is required to submit a biennial report to Congress on motor vehicle trade. The first report was submitted to the House Ways and Means and Senate Finance Committees in July 2022. In the report, USTR stated that there was evidence of producers making significant investments in North America in order to meet the automotive ROO, but industry is still adapting to the more complex rules. USTR noted that it will continue to assess the effectiveness of the rules. In November 2023, USTR launched its second biennial review, with a report to be submitted to Congress by July 2024. P.L. 116-113 also requires the U.S. International Trade Commission (ITC) to publish biennial reports on the economic impacts of the USMCA automotive ROO through 2031. Since USMCA's entry into force, U.S. trade of motor vehicles and parts with Canada and Mexico has been relatively stable (Figure 1). In its June 2023 report, ITC estimated that through the end of 2022, the USMCA automotive ROO had marginal impacts on U.S. competitiveness, and the full impact of the USMCA automotive ROO may not be apparent until the ROO are to be fully implemented in 2027. ITC noted that other factors, such as supply chain disruptions during the COVID-19 pandemic, had a greater impact than the ROO during the analysis period (July 2020-December 2022). ITC estimated that through the end of 2022, the USMCA automotive ROO

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