As it was expected by the Canadian and Mexican governments and their business communities in the automobile and auto parts manufacturing industries, during the 4th round of the NAFTA negotiations in Washington DC, the US negotiating team formally presented their proposal of change to the rule of origin that must be met to be entitled to preferential duty treatment (0% duty) for cars and their parts, when exported from Canada or Mexico into the US market.

The proposal confirmed the rumors; only vehicles that at least have an 85% of Regional Value Content ("RVC") (of Canada, the US and/or Mexico) and which have 50% of US Domestic Content, would qualify for 0% duty. The same applies to exported parts. This is an aggressive deviation from the current 62.5% of RVC that currently NAFTA calls for (NAFTA does not require now any US domestic content).

Car and auto parts producers in the NAFTA region, from US, Canada and Mexico and other Asian and European countries, have expressed concerns about the serious challenge to their regional supply change, if this measure would come into effect. Many of them have said it would be very difficult to meet the new threshold and therefore, they would be forced to pay duties when exporting to the US market.

Also, this proposal does not require that the 50% US Domestic Content applies to those vehicles or parts manufactured and sold in the US market. Only to the goods imported from Canada and Mexico.

The US proposal also seeks to eliminate the concept of substantial transformation as a way for manufactured goods to reach originating status in the NAFTA region. Therefore, it would only be through the RVC and US Domestic Content that origin would be achieved.

At this point, it does not seem that the Governments of Canada or Mexico would accept this change. Negotiations will continue with the 5th Round on November 17- 21 in Mexico City. Outcome of the negotiation is unpredictable.

We at the Automotive Focus group of Baker McKenzie will continue to monitor the developments of this negotiation and are ready to discuss with you any specific question as to the potential impact that the revised NAFTA would have in your organization.

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