Canada-U.S. Blog Trade Lawyers Cyndee Todgham Cherniak and Susan K. Ross

U.S. Demand For Local Content Rules of Origin for Autos May Be Contrary to GATT 1994 Article XXIV

Posted in NAFTA Renegotiations, World Trade Organization

Article XXIV of the General Agreement on Tariffs and Trade 1994 (“GATT 1994”) (and the Understanding on the Interpretation of GATT Article XXIV of the General Agreement on Tariffs and Trade 1994) may prevent some of the U.S. demands made at the start of the NAFTA modernization/renegotiation talks this week.  Article XXIV of GATT 1994 must be reviewed and understood.  It may be the key to stopping President Trump’s and USTR Lighthizer’s requested changes to the autos rules of origin and U.S. content requirements.  Let’s be clear, the ask would suggest that duties would be applicable to any autos originating in Canada or Mexico that do not meet certain unreasonable regional value content requirements and local U.S. content requirements.

NAFTA creates a free trade area as opposed to a customs union, like the European Union.  Article XXIV:5(b) of GATT 1994 provides:

“with respect to a free-trade area, or an interim agreement leading to the formation of a free-trade area, the duties and other regulations of commerce maintained in each of the constituent territories and applicable at the formation of such free–trade area or the adoption of such interim agreement to the trade of contracting parties not included in such area or not parties to such agreement shall not be higher or more restrictive than the corresponding duties and other regulations of commerce existing in the same constituent territories prior to the formation of the free-trade area, or interim agreement as the case may be.” (emphasis added)

Article XXIV:8(b) of GATT 1994 provides:

“For the purposes of this Agreement … A free-trade area shall be understood to mean a group of two or more customs territories in which the duties and other restrictive regulations of commerce (except, where necessary, those permitted under Articles XI, XII, XIII, XIV, XV and XX) are eliminated on substantially all the trade between the constituent territories in products originating in such territories.” (emphasis added)

Looking at these two provisions combined, trade cannot become more restrictive in a free trade agreement AND duties and other restrictive regulations of commerce must be eliminated on substantially all the trade.  Since the auto industry in North America constitutes a large portion of the trade between Canada and the United States and Mexico and the United States, adding new duties (removing eliminated duties) may be contrary to Article XXIV of GATT 1994.

If you consider that NAFTA, as it is currently implemented, does not eliminate all duties (so, we are already in a position on the line of “substantially all trade”), any new duties or reversing of elimination of duties, would push NAFTA into Article XXIV of GATT 1994 non-compliance.  This means that changes to remove eliminated duties could taint the entire NAFTA and cause other WTO Members to challenge any resulting modernized NAFTA at the WTO and cause the WTO DSB/Appellate Body to demand changes.  Other countries (such as South Korea or a EU country) may just take this WTO disputes settlement step if they think the USTR strategy is to force them to agree to the same restrictive rules of origin.

For more information about the NAFTA modernization, please contact Cyndee Todgham Cherniak at 416-307-4168 or at cyndee@lexsage.com.  There are other articles on the LexSage website about the NAFTA.