In the ongoing USMCA dispute on United States - Automotive Rules of Origin (USA-MEX-CDA-2022-31-01), in addition to their arguments that the U.S. unilateral interpretation of the USMCA Rules of Origin provisions for passenger vehicles and light trucks violates USMCA rules, Mexico and Canada have made a non-violation nullification or impairment claim. As far as I am aware, if the panel decides to rule on this issue, it would be the first ruling on NVNI outside the WTO context.
In this post, I provide excerpts of the main arguments by the parties. Let's start with Mexico:
192. Even if the Panel were to find that the U.S. unilateral interpretation of the automotive ROO, as such and as applied, is somehow consistent with the provisions of this Agreement, Mexico asserts in the alternative that such U.S. interpretation and its current and future application, via the ASR Approval Letters (and other current or future actions), nonetheless nullify or impair benefits Mexico reasonably expected to receive as a result of the U.S. tariff concessions on automobiles under Chapters 2 (National Treatment and Market Access for Goods), 4 (Rules of Origin), and 5 (Origin Procedures) of the USMCA.
193. Before turning to the legal standard and its application to this case, Mexico recalls that so-called “non-violation, nullification and impairment” provisions appear in a number of free trade agreements and the WTO agreements, and have been considered an important means of safeguarding a Party’s rights, particularly when another Party adopts a measure that disturbs the careful “balance of rights and obligations” otherwise set out in the agreement, regardless of whether that measure constitutes a direct violation of the provisions of an agreement
1. Legal Standard
194. Article 31.2(c) (Scope) of the USMCA provides that a Party may make a claim in dispute settlement when it “considers that a benefit it could reasonably have expected to accrue to it under Chapter 2 (National Treatment and Market Access for Goods), [...] Chapter 4 (Rules of Origin), [and] Chapter 5 (Origin Procedures) [...] is being nullified or impaired as a result of the application of a measure of another Party that is no inconsistent with this Agreement.”
195. The text of Article 31.2(c) envisions that a complaining Party must prove the existence of three elements: (i) the application of a measure by another Party (ii) nullifies or impairs (iii) a benefit that the complaining Party could have reasonably expected under commitments made in the identified chapters. No NAFTA or USMCA Panel has ever fully considered the meaning or application of this provision. However, it is modeled after similar provisions in the WTO agreements, including Article XXIII:1(b) of the GATT 1994, under which panels have concluded that complaining Members must establish identical elements.
196. With respect to the first element, Article 1.5 (General Definitions) of the USMCA defines a “measure” to include “any law, regulation, procedure, requirement, or practice.” As noted above, under WTO law, the concept of a “measure” has generally been construed very broadly to encompass any act or omission attributable to a Member, including in the form of instruments that are binding or non-binding, written or unwritten, and that have either present or prospective application.
197. With respect to the second element, WTO panels have primarily considered whether the application of the measure upsets the competitive relationship of imported products, including with respect to tariff concessions. Panels have likewise required complainants to show “a clear correlation between the measures and the adverse effect on the relevant competitive relationships”, and that the measure has made more than a de minimis contribution to the nullification and impairment. Thus, a measure “nullifies or impairs” a benefit if it causes an upset in the relevant competitive relationships.
198. As to the third element, the term “benefit” includes “an advantage, a good”, and “pecuniary profit”. Tariff concessions have been found to give rise to a “benefit” in the form of an expectation of market access opportunities, subject to the conditions of competition inherently bound in the tariff concession. Finally, in assessing whether a measure could reasonably be anticipated by the complaining party, WTO panels have presumed that a complainant cannot reasonably anticipate the adoption of measures introduced after the conclusion of the negotiations at which the relevant commitment was crystalized.
2. Application
199. As noted above, the United States holds a new, unilateral and incorrect interpretation of the USMCA automotive ROO, which it presently effectuates through measures such as the ASR Approval Letters. With respect to the ASR Approval Letters specifically, they impose a legally binding obligation on certain North American automakers that received approval for an ASR to calculate the RVC of finished vehicles, pursuant to the “direction” from USTR and CBP therein in order to qualify for USMCA preferential treatment. The ASR Approval Letters thus clearly constitute a procedure, requirement, and practice within the meaning of Article 1.5 and Article 31.2(c) of USMCA.
200. Further, the U.S. unilateral interpretation, as applied in the ASR Approval Letters and other statements and prospective enforcement actions, constitutes a nullification or impairment within the meaning of Article 31.2(c). Specifically, the U.S. reinterpretation upsets the competitive relationship between (i) vehicles domestically produced in the United States that are exported to Mexico and (ii) vehicles imported into the United States from Mexico, by unilaterally decreasing the proportion of imported vehicles that are eligible for duty-free treatment by means of an artificially increased RVC threshold.
201. By contrast, Mexico applies the calculation method as set forth in the plain text of the Agreement at its border and grants preferential treatment under the USMCA to vehicles meeting the RVC requirement under the unified RVC calculation methodology. This necessarily results in a greater proportion of U.S.-made vehicles meeting the requirement compared to Mexican-made vehicles imported under like circumstances into the United States. By favoring its own domestic production and discriminating against Mexican and Canadian production in this manner, the United States upsets the conditions of competition in the auto market, causing a nullification or impairment of negotiated benefits.
202. Lastly, Mexico had reasonable and legitimate expectations of a benefit arising from the U.S. agreement to the USMCA text, its tariff concessions for finished vehicles, and the specific ROO negotiated under the Agreement. The unified RVC calculation methodology was designed and negotiated by the Parties to achieve a delicate balance between incentivizing greater domestic sourcing and maintaining North American competitiveness in the global auto market. It is certainly reasonable to expect that the United States would apply the automotive ROO as negotiated, written, and agreed to by the Parties, not by some later-in-time unilateral reinterpretation designed to restrict duty-free access for vehicles to the U.S. market for domestic political purposes and to provide a useless and contradictory interpretation of Chapter 4 and the Automotive Appendix, which Mexico could not possibly have foreseen.
203. Moreover, adopting the new U.S. interpretation would lead to manifestly absurd results. It simply cannot be the case that the Parties, in seeking to improve upon NAFTA and streamline compliance procedures while maintaining a robust and globally competitive automotive industry, would agree to a text that would visit harm upon that very industry by imposing commercially uncompetitive RVC thresholds and burdensome calculation requirements.
204. By forcing automakers to undertake two separate core parts RVC calculations, the United States thus creates a problem that the negotiators from all three Parties were originally trying to avoid. Indeed, the extra calculation will only substantially increase overall compliance costs and force automakers to prioritize sourcing minor parts over macro-level advancements in vehicle parts and technologies when trying to meet the USMCA’s RVC thresholds (not to mention the other requirements related to steel, aluminum, and LVC).
205. Failure to meet that requirement, which takes on greater likelihood under the U.S. unilateral interpretation, would result in an automaker’s entire North American production failing to qualify for preferential treatment. This development is particularly nonsensical as automakers have already begun to invest substantially in increased local sourcing in the region, based on prior representations and explanations affirming the proper interpretation of the USMCA by U.S. officials. A new, unilateral interpretation of the plain text of the Agreement, which will manifestly jeopardize the USMCA’s overall objectives, certainly could not have been the intention of the Parties.
Turning to Canada, its submission starts with some useful history of NVNI:
174. Should the Panel find that the United States' interpretation of the Rules of Origin for vehicles, as maintained and applied in the measures at issue described above, does not violate CUSMA, then the Panel should find that those measures nullify or impair benefits that Canada could reasonably have expected to accrue to it within the meaning of Article 31.2(c) of CUSMA.
175. Article 31.2(c)81 allows for non-violation nullification and impairment (NVNI) claims under CUSMA. It provides that a Party may have recourse to dispute settlement under CUSMA if it considers that a "benefit" it could "reasonably" have expected to "accrue" to it under Chapter 4 and 5 (amongst other chapters), is being "nullified or impaired" as a result of the application of a "measure" of another party that is not inconsistent with the provisions of CUSMA.
176. In the sections that follow, Canada first sets out a brief background of NVNI claims to explain why this Panel should give considerable weight to World Trade Organization (WTO) jurisprudence on the formulation of the test for making an NVNI claim. Canada then sets out the proposed test, followed by demonstrating to the Panel that each element of the test for Canada’s NVNI claim is satisfied in this case.
1. Background on NVNI
177. The concept of nullification and impairment in trade agreements can be traced back to a resolution approved by the League of Nations in 1933. At the time, the League of Nations had convened a Monetary and Economic Conference to identify measures necessary to solve the "economic and financial difficulties" responsible for the "world crisis" at the time.
178. One of the measures recommended by the Subcommittee on Indirect Protectionism was the inclusion in future or existing treaties of a clause protecting against nullification and impairment of "any object of the treaty" by measures that do not infringe on the terms of the treaty. This recommendation was made with a view "to the general application of the principle of equitable treatment and friendly co-operation".
179. Such provisions found their way into numerous FTAs and eventually into the General Agreement on Tariffs and Trade (GATT 1947). However, the language used in various trade agreements versus that which was finally agreed upon under the GATT 1947 were different. The use of the phrase "benefit accruing" was specifically conceived during the Geneva Round of negotiations of the GATT 1947, and is now found in many modern FTAs, including CUSMA.
180. Furthermore, the language in modern FTAs reflect considerations of panels, formed under the GATT 1947 and the WTO, of the NVNI provision. Specifically, the concept of "reasonable expectations" under NVNI claims was first discussed during the Havana round of negotiations of the GATT 1947. The notion then evolved under various dispute settlement panel reports under GATT 1947 and, under the Marrakesh Agreement Establishing the World Trade Organization (WTO), in relation to GATT 1994. Today, we see the phrase "a benefit the Party could reasonably have expected to accrue" (or a variation of it) in the NVNI provisions of various FTAs, including CUSMA.
181. The language of the NVNI provision of CUSMA is indeed very similar to the language of the NVNI provision of the GATT 1994.
182. Canada therefore considers that the language of the NVNI provision in CUSMA is inextricably linked to the rationale for, and language of, the NVNI provision in the GATT 1994 and to considerations of that provision by WTO panels. In evaluating Canada's NVNI claim, this Panel should therefore give considerable weight to interpretative findings by those panels.
The rest of the Canadian argument is in paras. 183-217. (For more on the history of the NVNI remedy, including who actually came up with the famous words "nullify or impair," see an old article of mine here.)
And then in response, we have the United States:
V. Recourse Under Article 31.2(c) of the USMCA is Not Available to Complainants Because Complainants Have Not Demonstrated that the Measures Imposed by the United States Nullify or Impair the Benefits Canada and Mexico Could Reasonably Have Expected to Accrue to It
146. Complainants spend pages asserting that the U.S. interpretation has nullified or impaired benefits that Canada or Mexico could have reasonably expected to accrue.99 However, Complainants have not demonstrated that the measures imposed by the United States nullify or impair benefits that Canada and Mexico could reasonably have expected to accrue to them. Therefore, Complainants cannot make out a claim under Article 31.2(c).
147. In relevant part, Article 31.2(c) of the Agreement provides that:Unless otherwise provided for in this Agreement, the dispute settlement provisions of this Chapter apply: [. . . .] when a Party considers that a benefit it could reasonably have expected to accrue to it under [. . . .] Chapter 4 (Rules of Origin) [. . . .] is being nullified or impaired as a result of the application of a measure of another Party that is not inconsistent with this Agreement.
148. Accordingly, in order for the Complainants to make out a claim under Article 31.2(c) of the USMCA, Complainants must demonstrate (1) the application of a measure by a Party of the USMCA, (2) a benefit accruing under the USMCA, and (3) the nullification or impairment of the benefit as a result of the application of the measure.
149. The elements of an Article 31.2(c) USMCA are parallel to a nullification or impairment claim under Article XXIII:1(b) of the GATT 1994. The existence of a cause of action in relation to a measure that is not itself inconsistent with an agreement is extraordinary. The claim potentially permits countermeasures to be taken in a situation in which a party to the agreement is performing its commitments under that agreement. As WTO adjudicators have reasoned, such an exceptional claim “should be approached with caution” because “Members negotiate the rules that they agree to follow and only exceptionally would expect to be challenged for actions not in contravention of those rules.”
150. The requirements in USMCA in relation to a non-violation nullification or impairment claim are not extensively elaborated, but in light of the extraordinary nature of the claim, it is reasonable to require more than a mere statement that they enjoy a benefit and that the United States has adopted a measure that allegedly affects that benefit. For example, under Article 31.2(c), a party must consider “that a benefit it could reasonably have expected to accrue” is being nullified or impaired, and under Article 31.6.3, this forms part of the “legal basis of the complaint”. Canada and Mexico therefore must prove that it was reasonable to expect a benefit to accrue. Such a circumstance could conceivably arise if the challenged measure could not have been reasonably anticipated at the time the relevant benefit was negotiated.
151. Canada and Mexico have failed to demonstrate that the U.S. interpretation as expressed in its ASR approval letters have nullified or impaired any benefits – because they cannot reasonably argue that they could not have anticipated the United States would apply an interpretation of the core parts origination requirements and calculations consistent with the plain meaning of the text in the context of Chapter 4.
A. Complainants Have Failed to Prove That They Could Not Have Reasonably Anticipated the United States Would Apply an Interpretation Consistent with the USMCA Text
152. Complainants are seeking to demonstrate that they had a legitimate expectation for certain market access – namely, that it was reasonable for them to expect that the United States would provide market access for their passenger vehicles and light trucks based on an interpretation of the core parts calculations that was inconsistent with the Agreement. Put differently, Complainants must demonstrate that they could not have reasonably anticipated during the negotiation that the U.S. would implement the core parts origination requirement consistent with the correct interpretation of the Agreement.
153. Canada states that communications from the United States during the negotiations that were sent to Canada and vehicle producers directly contract the U.S. interpretation. As we detail in section III.D above, this is not true. As an initial matter, negotiations for the USMCA concluded on September 30, 2018, and the USMCA was signed on November 30, 2018. None of the communications submitted by Canada or Mexico, which provide a conflicting and incorrect interpretation, took place before the conclusion of the negotiations on September 30, 2018, or prior to the signature of the Agreement on November 30, 2018. In fact, we have no record of any communications between U.S. officials and any foreign government officials or vehicle producers before negotiations concluded, which provide this conflicting and incorrect interpretation. As explained in section III.D.4 above, the unilateral communications from certain U.S. officials to Canadian officials and to industry representatives that communicated the apparently conflicting and inconsistent interpretation, took place after negotiations concluded. Therefore, due to the timing of these communications, Complainants could not have reasonably anticipated that the United States would have implemented Canada’s and Mexico’s interpretation because this interpretation was not communicated with Canada and Mexico at the time the rules of origin provisions were negotiated.
154. Second, as discussed in section III.E.4 above, the negotiating documents submitted by the Complainants support the U.S. interpretation, and do not support the Complainants’ interpretation. Mexico asserts that it was “reasonable to expect that the United States would apply the automotive ROO as negotiated, written, and agreed to by the Parties.” As demonstrated in this submission, including support from negotiating history, the U.S. interpretation does just that. Complainants do not demonstrate otherwise, and accordingly, the materials submitted by Complainants are not evidence that Complainants could have reasonably relied on in support of their interpretation.
155. And third, as we detail in section III.D above, the U.S. interpretation does not run counter to the object and purpose of the Agreement – rather, it is Complainants’ interpretation that runs counter to the object and purpose of the Agreement. Complainants do not demonstrate otherwise.
156. Finally, the U.S. interpretation is not, as Mexico asserts, “designed to restrict duty-free access for vehicles to the U.S. market for domestic political purposes and to provide a useless and contradictory interpretation of Chapter 4 and the Automotive Appendix”. Rather, the U.S. interpretation, which is consistent with the terms of the USMCA, strives to increase the RVC of vehicles, investment, and jobs in the North American market. Mexico offers no factual support to the contrary.
157. Accordingly, Canada and Mexico have not demonstrated they could not have reasonably anticipated that the United States would apply interpretations of the vehicle RVC requirement and of the core parts origination requirement that are consistent with the Agreement. Consequently, Complainants’ Article 31.2(c) claim must fail.
It's very hard to say what the panel will do with this issue. Sorting out what the NVNI standard should be in the USMCA context, and using WTO jurisprudence to do so, will be a challenge. If the panel finds a violation, it can exercise judicial economy and avoid NVNI entirely. If there is no violation, however, avoiding the NVNI claim may be difficult.
