The Lowdown on the USMCA Roll Up

 You may have seen recent press reports over the interpretation of the so-called "roll-up" provisions of the RVC calculation for certain motor vehicles under the USMCA. This is a complicated issue and there are varying interpretations of the law and the facts, so I figured I could provide some context.

For this to make sense, you might want to have the current version of the Uniform Regulations on Rules of Origin handy. 

The underlying issue is what counts toward the value of non-originating materials when calculating the Regional Value Content of a passenger vehicle or light truck. The starting point for that is Section 14 (p. 39721) of the aforementioned regulations. Section 14(1) begins with a clear and declarative statement:

Roll-Up of Originating Materials

(1) The 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 regional value content 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. For greater certainty, if the production undertaken on non-originating materials results in the production of a good that qualifies as originating, no account is to be taken of the non-originating  material contained therein if that good is used in the subsequent production of another good.

 What this means is that, in contrast to the NAFTA tracing rules, an originating material is wholly originating without regard to any non-originating material used in its production. The non-originating material, in other words, rolls up into the originating material. The VNM of the vehicle will not include any VNM from the originating material.

That is a good and helpful rule that rewards production in North America that creates originating materials.

The non-automotive regulations contains a similar rule at Section 7(4), at page 39704. This indicates that the parties were serious about the roll-up rule.

The controversy arises in relation to the awkwardly-named "super-core." Section 14(4) notes that certain "core parts" listed in column 1 of Table A.2 must be originating for the passenger vehicle or light truck to qualify as originating. The table includes, for example, engines, transmissions, and advanced batteries. Moreover, with the exception of batteries, all of these items must qualify on the basis of the enhanced regional value content requirement. See § 14(5)-(6). The regulations allow the producer to limit VNM in the RVC analysis of the core parts to just non-originating materials listed in column 2 of Table A.2. That limitation on VNM is helpful to qualify those parts individually for purposes of satisfying the requirements of subsections (4) through (6).

But, because of subsection (4), if any one of those parts fails to qualify, the vehicle is at risk of not qualifying. To avoid that prospect, the regulations allow for averaging the RVC of the super-core parts. Section 14(10) covers that when it says:

For the purpose of satisfying the requirement specified in subsections (4) through (6) and as an alternative to determining the VNM based on the method in subsection (7), the regional value content of the parts listed in column 1 of Table A.2 of these Regulations may be determined, at the choice of the vehicle producer or exporter, by treating these parts as a single part, which may be referred to as a super-core part . . . .

 The output of that analysis is a single RVC for the super-core. According to Section 14(12)(emphasis is mine):

Once this average, by either methodology, exceeds the required thresholds listed in subsection (13), all parts used to calculate this average are considered originating.

The text of the Agreement is similar. The automotive rules of origin are an Appendix to the main rules. Article 3(7) of the Appendix includes the requirement that core parts listed in Column 1, Table A.2 be originating. The Agreement also says that the core parts can be averaged as a super-core to calculate the collective RVC and that (emphasis added):

If this regional value content meets the required threshold under paragraph 2, then each Party shall provide that all parts under Table A.2 of this Appendix are originating and the passenger vehicle or light truck will be considered to have met the requirement under paragraph 7.

This is where the controversy arises. The question is whether the parts are originating individually and for all purposes or only for the purpose of confirming that the requirements of subsection (4) are met?

The roll-up provision of subsection (1) and the similar provision in Section 7 seem to indicate that once the part is determined to be originating, it no longer contains any VNM to be used in the RVC calculation. Section 14(12) does not contain any limitation on the conclusion that the parts are originating. And, that bold "and" in the text of the Agreement seems to indicate that the super-core averaging accomplishes two separate things. First, the parts are originating and separately the vehicle satisfies the requirement that those parts be originating. 

The problem seems come from Section 14(10) of the regulations, which is where the concept of the super-core is first introduced. That section, quoted above, includes the limitation "For purposes of satisfying the requirements specified in subsections (4) through (6) . . . ." the parts can be treated as a super-core. But, subsection (12), which explains that as a consequence of meeting the RVC threshold "all parts used to calculate this average are considered originating" contains no such limitation. 

So, does the limitation of subsection (10) apply to subsection (12)? It appears not. The Agreement contemplates two distinct consequences of a qualifying super-core. As drafted, the Regulations honor that that agreement by (1) saying the vehicle can qualify and (2) that the core parts qualify as originating.

According to press reports, the United States disagrees. The U.S. reportedly reads the super-core provisions as limited to only the qualification of the parts for purposes of the requirements of subsections (4) through (6) of Section 14. As a result, when calculating the RVC of the vehicle, the value of non-originating materials used in the production of the core parts will be included in the VNM of the vehicle without the benefit of the roll-up provision of subsection (1). That makes it harder for producers to qualify vehicles and re-introduces some aspects of NAFTA-style tracing, which the USMCA supposedly eliminated. 

The additional burden may be exactly why the U.S. is approaching the roll-up rule in this manner. But, again based on press reports, there are indications that Canada and Mexico disagree. There are also reports, tip to Inside U.S. Trade (subscription required), indicating that some at the Office of the USTR initially agreed with the more liberal reading of the Agreement and regulations. Customs and Border Protection recently stated that it was prepared to enforce the law under either interpretation. 

So where does this leave producers? In a quandary.  This needs to be clarified. The more limited reading of the roll-up rule might mandate complex and expensive changes in purchasing. Syncing that up with the vehicle averaging period may also create difficulty. 

Here's hoping that the newly-installed USTR can get together with her counterparts in Canada and Mexico to resolve this.