The Impact of Rules of Origin on Supply Chains: USMCA’s Auto Rules as a Case Study

In recent decades, supply chains have become more global while bilateral and regional free trade agreements (FTA) have continued to grow in popularity. For free trade agreements to operate as intended— that is, to provide benefits to the member countries—it must be possible for goods to be identified as products of an FTA member and therefore be eligible for preferential treatment. Free trade agreements also are expected to encourage manufacturers outside the agreement’s boundaries to locate production facilities within the countries party to the agreement to take advantage of the preferential treatment for goods produced there. Rules of origin codified in trade agreements play a crucial role in shaping global supply chains by setting out rules to ascertain the origin of a good.

The newly negotiated U.S.-Mexico-Canada Agreement (USMCA) demonstrates the power of rules of origin to force the many businesses that depend on the current trade agreement to alter their supply chains and business models. Analyzing the new rules, the Scholl Chair in International Business finds that the USMCA will bring new costs to both parts and auto manufacturers and consumers and may provide a boon to North American steel and aluminum manufacturers.

This report is made possible through the generous support of the Alcoa Foundation.