Alerts and Updates
Uniform Regulations Provide Key Guidance on How to Comply with the New USMCA
July 8, 2020
The Uniform Regulations also offer key interpretive guidance relating to various USMCA provisions that affect the automotive industry.
Since the publication of our previous Alert on the new United States-Mexico-Canada Agreement (USMCA), the Office of the U.S. Trade Representative (USTR) has issued the Uniform Regulations for the USMCA, which have been codified in an interim final rule that U.S. Customs and Border Protection (CBP) published in the Federal Register on July 1, 2020. As discussed below, the Uniform Regulations provide clarification on a number of important issues and offer some grace periods for companies to comply with certain requirements enumerated under the USMCA, which has replaced the North American Free Trade Agreement (NAFTA) and which entered into effect on July 1, 2020.
Overview of the Uniform Regulations
On June 3, 2020, the USTR published an interim version of the Uniform Regulations concerning the interpretation, application and administration of certain critical provisions of the USMCA. Specifically, the Uniform Regulations address the following chapters of the USMCA:
- Rules of Origin (Chapter 4);
- Origin Procedures (Chapter 5);
- Textiles and Apparel Goods (Chapter 6); and
- Customs Administration and Trade Facilitation (Chapter 7).
A summary of some of the key provisions of the Uniform Regulations, which are voluminous in length, is provided below.
Clarifications Relating to De Minimis Rules for Textiles and Apparel
Pursuant to the text of the USMCA, the de minimis threshold for calculating regional value content (RVC) for rules of origin purposes has been raised from 7 percent under NAFTA to 10 percent under the USMCA for most goods and with certain exceptions. Essentially, the de minimis rules generally hold that a good is considered to be an originating good if the value of any nonoriginating materials used to produce the good does not exceed 10 percent of either the transaction value of the good or the total cost of the good.
The Uniform Regulations provide some key clarifications relating to the de minimis rules that pertain to textile and apparel products. Generally, they establish a de minimis rule for nonoriginating 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 percent or less of the total weight of the good and the foreign elastomeric content does not exceed 7 percent of the total weight. For textile products falling within Chapters 50 through 60 of the Harmonized System (HS), 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.” 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.
Requirements for a Good to Retain Originating Status When Transshipped
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. Usefully, the Uniform Regulations identify which goods are exempted from these requirements, and further include examples of insignificant operations that would not deprive a good of its originating status. The list of such insignificant operations is nearly identical to that set forth under the NAFTA regulations, but it includes certain additions (e.g., separation from a bulk shipment; storing; labeling or other marking required by the importing USMCA country).
Under the USMCA, an importer may be required to establish, through documentation, that a good meets these requirements and should retain its originating status. For example, in the case of storage, an importer may provide storage documents or a copy of the customs control documents demonstrating that the good remained under customs control while outside the geographic territory of the United States, Mexico or Canada.
Guidance on Various Provisions Affecting the Automotive Industry
The Uniform Regulations also offer key interpretive guidance relating to various USMCA provisions that affect the automotive industry. As discussed below, the guidance relates to the USMCA’s requirements for various kinds of vehicles pertaining to RVC, labor value content (LVC), and steel and aluminum content.
As discussed in our previous Alert, as in the case of NAFTA, RVC can be calculated for vehicles under the USMCA using either the net cost method (NC method) or the transaction value method (TV method), although it is important to note that the RVC requirements set forth under the USMCA are higher than those enumerated under NAFTA. For new passenger vehicles and light trucks, the RVC requirement starts at 66 percent on July 1, 2020, and increases incrementally over a three-year period to 75 percent starting on July 1, 2023. For heavy trucks, the RVC requirement starts at 60 percent on July 1, 2020, and increases to 70 percent effective July 1, 2027.
The USMCA also establishes higher RVC requirements for various kinds of parts for vehicles. For example, the RVC requirement for core parts for use in passenger vehicles and light trucks will rise to 75 percent (NC method) and 85 percent (TV method) by 2023. In contrast, the RVC requirements for principal parts for use in heavy trucks will increase to 70 percent (NC method) and 80 percent (TV method) beginning July 1, 2027.
Significantly, the Uniform Regulations prescribe the RVC calculation methods that can be used for automotive parts. The specific method to be used depends largely on whether the part is original equipment or an aftermarket part. In general, the RVC calculation methods applicable to original equipment parts mirror those applicable to the vehicles into which the parts are incorporated. Aftermarket parts, by contrast, must generally satisfy a singular minimum RVC requirement, generally 50 percent or 60 percent under the net cost method.
The Uniform Regulations also specify that a producer may use “averaging” to meet its RVC obligations. Averaging allows the producer to use data from the entirety of its fiscal year to calculate the RVC of a particular category of vehicle. In order to implement averaging, the producer must notify CBP (or the customs administration of the relevant USMCA country) to which category of vehicle is to be exported by July 31, 2020, and subsequently at least 10 days before the first day of its fiscal year. In electing averaging, the vehicle producer must state information regarding the specific class of the vehicles (passenger vehicles, light trucks or heavy trucks) subject to averaging. Once elections have been made, the producer cannot change the selected category or the period it intends to use for its averaged regional value calculation.
In addition, the Uniform Regulations also provide clarification relating to the requirements set forth in the USMCA mandating that, on a phased-in basis and dependent on the type of vehicle, 70 percent of a vehicle’s steel and aluminum must originate in North America and that the steel must be melted and poured within North America to be deemed as originating from there. While the USMCA text indicated that the steel and aluminum purchase requirement would apply to all of “the vehicle producer's purchases of [steel and aluminum]… in the territories of the Parties,” the Uniform Regulations clarify that the requirement applies only to steel and aluminum “purchased for use in the production of passenger vehicles, light trucks or heavy trucks.” The requirement therefore does not apply to steel and aluminum purchased for other uses, such as the production of other vehicles, tools, dies or molds.
The Uniform Regulations also provide clarification regarding the LVC requirements. Under the USMCA, the LVC provisions require that automakers certify that specific percentages of content are made by “high wage” workers. The specific LVC requirements vary by type of vehicle and are implemented on a phased-in basis (e.g., the LVC requirement for passenger vehicles will rise from 30 percent to 40 percent, and in contrast, the LVC requirement for light trucks and heavy trucks will rise from 30 percent to 45 percent). The Uniform Regulations provide the fixed hourly rates averages that would constitute “high wage” work as US$16 in the United States, CA$20.88 in Canada or MXN$294.22 in Mexico.
In addition, the Uniform Regulations describe which wages can be incorporated into the hourly wage rate calculations. Specifically, the allowable wages include all relevant hours worked by full-time, part-time, temporary and seasonal workers. However, wages for the LVC calculation exclude management staff with the authority to make final decisions to hire, fire, promote or transfer personnel, time spent in research and development, as well as interns, students or any other worker that does not have an express or implied compensation agreement. The Uniform Regulations further specify what actions are included in direct production, which has been expanded beyond general assembly to include part inspection, quality control, receiving or giving on-the-job training and directly servicing and cleaning lines.
Elaboration on Certification and Verification Requirements
As of the USMCA’s implementation date (July 1, 2020), companies can no longer use or rely on the NAFTA certificate of origin form. As stated in the Uniform Regulations, the new certifications, which can be issued by importers, exporters or producers, must satisfy all of the necessary data elements mandated by the USMCA and the USMCA Implementation Act that was signed into law in January 2020. The interim final rule issued by CBP on July 1 provides detailed guidelines on what information must be included in such certifications, which may require obtaining certifications from CBP and/or the U.S. Department of Labor for certain automotive-related certifications.
The Uniform Regulations also explicitly identify the powers and procedures that customs authorities in the three countries can utilize to verify the accuracy of the information contained in the certifications that are provided to them. Such powers include the ability of the customs authorities to audit directly the exporters and producers in another country.
Significantly, though, the Uniform Regulations state that producers, exporters and importers of vehicles and vehicle parts will be provided with additional time to respond to requests by customs authorities for information supporting their certifications. Specifically, the deadline for such parties to have gathered and be able to provide the necessary supporting information and materials to customs authorities will be December 31, 2020.
Actions That Companies Can Take to Comply with the USMCA
As the discussion above indicates, there are many new issues that companies will have to consider now that the USMCA has entered into effect. Such issues include, among other things:
- Determining whether products qualify for preferential treatment in light of the USMCA’s rules of origin, which differ in some significant ways from the NAFTA’s rules of origin for certain products;
- Developing procedures for complying with the USMCA’s requirements for maintaining a good’s originating status in the case of transportation outside the geographic territory of the United States, Mexico or Canada;
- Making necessary RVC, LVC, and steel and aluminum content calculations for motor vehicles and their parts; and
- Obtaining new USMCA certifications from suppliers and/or creating self-certifications that satisfy all of the USMCA’s requirements.
Given the complexity and novelty of such issues, companies may wish to consider seeking assistance from experienced international trade practitioners.
For More Information
If you would like further information about this Alert or other matters pertaining to the USMCA, please contact Geoffrey M. Goodale, Rosa M. Ertze, Miguel de Leon Perez, any of the attorneys in our International Group, any of the attorneys in our Mexico Business Group or the attorney in the firm with whom you are in regular contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.