History of USMCA Agreement between the United States of America, the United Mexican States, and Canada
On May 23, 2017, the United States Trade Representative (“USTR”) published in the Federal Register a notice of the United States’ intention to begin negotiations with Canada and Mexico regarding modernization of the North American Free Trade Agreement (“NAFTA”). See 82 FR 23699. Through these negotiations, the United States sought to create more balanced, reciprocal trade that supports high-paying jobs for Americans and grows the North American economy.
On November 30, 2018, the Governments of the United States of America, the United Mexican States, and Canada signed the Protocol Replacing the North American Free Trade Agreement with the Agreement between the United States of America, the United Mexican States, and Canada (“USMCA”), and on December 10, 2019 the three countries agreed to a Protocol of Amendments to the USMCA. All three countries ratified the USMCA; Mexico on December 12, 2019, the United States on January 29, 2020, and Canada on March 13, 2020.
The USMCA recognizes that international trade, investment, and economic growth can be facilitated through the implementation of government-wide practices that promote regulatory quality through greater transparency, objective analysis, accountability, and predictability. The USMCA also seeks to promote the protection and enforcement of labor rights, the improvement of working conditions, and the strengthening of cooperation on labor issues.
In support of these goals, the USMCA includes new rules of origin criteria for claiming preferential tariff treatment for automotive goods, including LVC requirements as set forth in Article 7 of the Appendix to Annex 4-B of the USMCA (“Automotive Appendix”).
The LVC requirements promote more high-wage jobs for the U.S. auto industry by requiring that a significant portion of motor vehicles be made with high-wage labor.[2] The LVC requirements state that for a passenger vehicle, light truck, or heavy truck (“covered vehicle”) to be eligible for preferential tariff treatment, a minimum percentage of the cost of the vehicle must involve certain high-wage expenditures.
After a transition period of 3 years with gradually increasing percentages (or longer if a producer successfully petitions to be covered under the USMCA’s alternative staging regime),[3] as discussed in Articles 7 and 8 of the Automotive Appendix, at least 40 percent of the value of passenger vehicles and 45 percent of the value of light and heavy trucks must meet these high-wage expenditure requirements. The three categories of high-wage expenditures are as follows:
i. High-wage material and manufacturing expenditures.[4]
The high-wage material and manufacturing expenditures provision requires that, after a phase-in period, beginning on July 1, 2023 at least 25 percent of the annual purchase value or net cost of a passenger vehicle, or 30 percent of the annual purchase value or net cost of a light truck or heavy truck, come from parts and materials used in the production of those vehicles, and Start Printed Page 39784produced in a North American production plant or facility, or from any labor costs in a North American vehicle assembly plant or facility, with a production wage rate of at least US$16 per hour.
ii. High-wage technology expenditures
The high-wage technology expenditures provision allows producers to claim a credit towards the LVC requirements of up to 10 percent. The credit is equal to the vehicle producer’s total annual expenditures on wages in North America for research and development or information technology as a percentage of the producer’s total annual expenditures on production wages.
iii. High-wage assembly expenditures
The high-wage assembly expenditures provision permits producers to claim a single credit of five percent towards the LVC requirements if the producer has an engine, transmission, or advanced battery assembly plant meeting certain production capacity standards, or has a long term contract with such a plant, in North America with an average production wage rate of at least US$16 per hour.
The USMCA also states that a claim for preferential tariff treatment, including preferential tariffs for automotive goods, must be based on a certification of origin completed by the importer, exporter, or producer. An importer claiming preferential tariff treatment for a good imported into a USMCA Country (the United States, Mexico, or Canada) must maintain all documentation, records, and information necessary to demonstrate the basis for the claim. Exporters and producers must maintain all records necessary to support a claim for preferential tariff treatment for a good for which the exporter or producer provided a certification of origin.
The USMCA further provides that the USMCA Countries may conduct a verification of a certification or claim for preferential tariff treatment. Pursuant to the USMCA, such verifications may include written requests for information and documentation, onsite visits to production plants and facilities, as well as other procedures to be decided by the USMCA Countries.
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