The United States-Mexico-Canada Agreement (USMCA), which entered into force on July 1, 2020, replacing NAFTA, governs the terms of trade among the United States, Mexico, and Canada. For businesses engaged in North American trade, USMCA’s rules of origin are among the most practically significant and technically complex aspects of the agreement. A ‘rule of origin’ determines whether a specific good qualifies for the USMCA’s preferential tariff treatment — typically zero or reduced duty rates — when traded between the three USMCA member countries. Goods that do not meet the applicable rule of origin are not entitled to USMCA treatment and are subject to the normal, most-favored-nation (MFN) tariff rates that apply to imports from non-USMCA countries. For many product categories, the difference between the USMCA preferential rate (zero) and the MFN rate can be several percentage points, making the rules of origin analysis a critical cost consideration for importers and exporters.
USMCA’s rules of origin are more restrictive than NAFTA’s for many product categories, reflecting the agreement’s policy objective of encouraging more manufacturing value to be created within North America rather than in third countries, particularly China. The automotive sector’s rules of origin are the most prominent example: USMCA requires significantly higher North American content in vehicles and auto parts than NAFTA required, including a novel labor value content (LVC) requirement designed to ensure that a portion of automotive production occurs at facilities paying wages above a specified threshold. These new rules have forced the automotive industry to restructure supply chains and in some cases relocate production to the United States and Canada.
How USMCA Rules of Origin Work
USMCA’s rules of origin, set out in Chapter 4 and Annex 4-B of the agreement, specify for each tariff subheading the requirements that a good must meet to qualify as an ‘originating good’ entitled to preferential treatment. The three primary types of rules are: tariff classification change (TCC) rules, regional value content (RVC) rules, and a combination of the two.
A tariff classification change rule requires that the finished good’s HTS tariff classification differ from the classification of each non-originating material used in its production, at the chapter, heading, or subheading level as specified in the rule. This rule ensures that non-originating (i.e., non-USMCA) inputs are sufficiently transformed in the USMCA region to result in a new product at the relevant level of classification. The more specific the required classification change (chapter change versus subheading change), the more transformation is required: a chapter change requirement is typically easier to meet than a subheading change requirement. For products made from inputs classified in the same HTS chapter as the finished good — for example, garments made from fabric — a TCC rule requiring a chapter change would demand transformation that goes beyond converting the fabric into the garment, which cannot be satisfied by typical apparel assembly operations.
A regional value content rule requires that a specified percentage of the good’s transaction value (or net cost) be attributable to USMCA-region production. The RVC threshold varies by product: some rules require 50 percent RVC based on transaction value, others require 60 or 70 percent based on net cost. The transaction value method calculates RVC as the good’s transaction value minus the value of non-originating materials, divided by the transaction value. The net cost method uses the net cost of the good (excluding royalties, sales promotions, packing and shipping costs, and other specified amounts) as the denominator. For goods where the RVC requirement can be satisfied either way, importers and exporters typically calculate both and choose the method that produces the higher qualifying percentage.
Automotive Rules of Origin
The automotive sector rules of origin are USMCA’s most complex and most commercially significant provisions. USMCA requires that passenger vehicles meet a Regional Value Content (RVC) of 75 percent for most core parts to qualify for duty-free treatment —ighificantly higher than NAFTA’s 62.5 percent requirement. In addition to the higher RVC requirement, USMCA introduced two novel requirements with no NAFTA precedent: a steel and aluminum purchase requirement (vehicles must incorporate specified minimum percentages of steel and aluminum that are ‘melted and poured’ in North America) and a labor value content (LVC) requirement.
The LVC requirement mandates that a specified percentage of the vehicle’s value be produced by workers earning at least $16 per hour. Specifically, by 2023, 40 percent of the production value of passenger vehicles and 45 percent of the production value of light trucks must be generated by workers earning at least $16 per hour. This provision was designed to ensure that the USMCA’s preferential tariff rates benefit North American workers, not just North American geography, and to reduce the incentive to locate automotive production in low-wage Mexican facilities. The LVC requirement has required automotive producers to audit the wage levels at their production facilities and supply chain plants, restructure production allocations, and in some cases renegotiate labor agreements.
Certification of Origin
Unlike NAFTA, which required importers to obtain a Certificate of Origin (CO) on a specific government form from the exporter, USMCA allows the origin certification to be provided by any certifying party — the importer, the exporter, or the producer — in any format, as long as the certification contains the minimum data elements specified in USMCA Annex 5-A. This flexibility is a practical improvement over NAFTA, as it allows companies to incorporate origin certifications into their commercial invoices, bills of lading, or other trade documents, rather than maintaining a separate CO form for every shipment.
The USMCA origin certification must contain: the legal name, address, and contact information of the certifying entity; the certifier (importer, exporter, or producer); a description of the goods including HTS tariff classification; a statement that the goods qualify as originating under USMCA; the period of certification (for blanket certifications covering multiple shipments, up to 12 months); and the certifier’s signature and certification date. The certifying party must have a reasonable basis to believe that the goods qualify as originating and must maintain sufficient records to support the certification for a minimum of five years. An importer who claims USMCA preferential treatment based on an exporter’s or producer’s certification bears the risk that the certification is incorrect, and may be required to pay retroactive duties if CBP determines that the goods do not qualify.
Recordkeeping and Verification
USMCA requires that all parties — importers, exporters, and producers — maintain records supporting origin certifications for a minimum of five years from the date of the certification. CBP has authority to verify USMCA claims through several mechanisms: requests for supporting documentation, requests for written questionnaires, and, in the case of Mexican or Canadian exporters and producers, verification visits conducted in cooperation with the relevant customs authority. USMCA’s verification procedures are more structured and predictable than NAFTA’s, which helps companies know what documentation they need to maintain.
When a USMCA preference claim is denied — either because CBP determines that the goods do not meet the applicable rule of origin or because the importer failed to maintain adequate supporting documentation — the importer is required to pay the full MFN duty rate on the affected entries, plus interest. For goods that have been imported in large volumes over several years on the basis of USMCA preference claims, a denial affecting all historical entries can result in substantial retroactive duty liability. Importers who claim USMCA preference should conduct periodic internal reviews of their origin qualification analyses and supporting documentation to ensure that their claims remain supportable as supply chains and product specifications evolve.