USMCA Annex 4-B: RVC Thresholds, Labor Value, and Steel Sourcing

Under the USMCA automotive rules of origin set out in Annex 4-B, a vehicle or auto part earns duty-free entry among the United States, Mexico, and Canada only when it clears four separate tests: a regional value content threshold, a labor value content threshold tied to a $16-per-hour wage floor, a 70 percent North American steel and aluminum sourcing requirement, and a documented certification of origin backed by five years of records. Missing any one of them costs the preference, and the vehicle pays the standard Most-Favored-Nation tariff instead.

Regional Value Content Thresholds

Every finished vehicle must meet a minimum Regional Value Content, calculated using the net cost method. Passenger vehicles and light trucks (Harmonized Tariff Schedule headings 8703 and 8704.21) need 75 percent. Heavy trucks reach 70 percent, with that figure phasing in fully on January 1, 2027.

The net cost method begins with the total cost of producing the vehicle and subtracts four categories that don’t reflect real manufacturing activity: sales promotion, marketing, and after-sales service costs; royalties; shipping and packing; and interest costs more than 700 basis points above the applicable government rate for comparable maturities.¹ The RVC percentage is the share of that net cost attributable to originating materials, labor, and overhead from the three USMCA countries.

Unlike NAFTA, USMCA does not permit the simpler transaction value method for finished vehicles. The net cost method is mandatory for all vehicles in headings 8701 through 8708.¹ That matters because net cost typically produces a lower percentage than transaction value, making the threshold harder to clear. For parts, manufacturers can often choose between the two methods, with correspondingly higher percentage requirements when transaction value is used.

Vehicles that fall short lose preferential treatment and pay MFN rates when entering the United States. For passenger vehicles, the MFN rate is 2.5 percent. For light trucks, it is 25 percent.² Some manufacturers have concluded that paying the 2.5 percent passenger-vehicle duty is cheaper than restructuring supply chains to reach 75 percent.

Core, Principal, and Complementary Parts

Annex 4-B sorts every component into one of three tiers, each with its own RVC threshold. The tiers are defined by specific Harmonized Tariff Schedule subheadings listed in tables within the Appendix to Annex 4-B, so classification is a matter of tariff code, not judgment.

Core Parts

Core parts are the highest-value, most complex components. For passenger vehicles and light trucks they must meet 75 percent RVC under net cost, or 85 percent under transaction value where that method is available. The core parts table includes engines and engine parts, lithium-ion batteries, chassis, vehicle bodies, body stampings, gear boxes, drive axles, suspension systems, and steering assemblies.¹

Principal Parts

Principal parts carry a 70 percent net cost RVC, or 80 percent transaction value. This group covers fuel and cooling pumps, air conditioning systems, fans, electronic brake systems, and similar mid-tier assemblies.¹

Complementary Parts

Complementary parts face the lowest bar. For passenger vehicles and light trucks the threshold is 65 percent net cost, or 75 percent transaction value, and covers small electric motors, headlights, wiring sets, and similar components.³ For heavy trucks, the complementary parts threshold drops to 60 percent net cost.¹

Accurate tier classification is essential. A single core part treated as principal can distort the entire vehicle’s RVC and jeopardize preferential treatment for the finished product.

Labor Value Content and the $16 Wage Floor

Labor Value Content has no precedent in prior trade agreements. It requires that a meaningful share of the vehicle’s value come from workers earning at least $16 per hour in base wages. The total LVC is 40 percent for passenger vehicles and 45 percent for light and heavy trucks.⁴ The total is built from three components.

The largest is high-wage material and manufacturing expenditures: a minimum share of the vehicle’s value must come from North American plants where direct production workers earn at least $16 per hour on average. That piece must contribute at least 25 percentage points for passenger vehicles and 30 percentage points for light and heavy trucks.⁴

Producers can earn up to 10 percentage points through high-wage technology expenditures, meaning research, development, and information technology wages. To claim it, a producer must show that annual wages paid to R&D and IT workers meeting the $16 threshold equal or exceed 10 percent of its annual production wages.⁴

A separate 5-percentage-point credit is available if the producer operates, or holds a long-term contract of at least three years with, an engine, transmission, or advanced battery assembly plant in North America that pays at least $16 per hour on average.⁴

What counts toward the $16 rate is narrow. Only base wages paid for each hour of direct production work qualify. The calculation excludes benefits, bonuses, premium payments, incentive pay, overtime premiums, profit-sharing, tooling allowances, and performance bonuses.⁴ A plant paying $14 in base wages plus $4 in health insurance does not qualify. The $16 rate is not indexed to inflation. It changes only if all three USMCA countries agree, and the Department of Labor then publishes the revised rate in the Federal Register.⁵

Steel and Aluminum Sourcing

Separate from RVC and LVC, at least 70 percent of a producer’s total steel and aluminum purchases must originate in North America.⁶ The test runs at the corporate level, covering all steel and aluminum purchased for the producer’s North American vehicle operations.

Steel qualifies as originating only if it was melted and poured within the United States, Mexico, or Canada. Processing or finishing imported slabs in a North American mill is not enough. Aluminum follows the parallel standard: primary smelting or casting must occur in the region. Falling below 70 percent can disqualify vehicles regardless of how well they score on RVC and LVC. Producers must collect origin documentation from their metal suppliers and keep those records for at least five years.⁷

Certification of Origin and Records

A claim for preferential treatment starts with a Certification of Origin. U.S. Customs and Border Protection provides a fillable template, though using it is not mandatory as long as the required data elements are present.⁸ The certification must include the exporter’s, producer’s, and importer’s names and addresses, the HTS classification of the good, and a description of the origin criteria the vehicle or part satisfies.

The paper trail behind the certification is substantial. Producers need detailed cost breakdowns separating material values, labor, and overhead for RVC. Payroll records must show that production workers at qualifying plants earn at least $16 per hour in base wages. Steel and aluminum purchase records must trace metals back to the smelter or mill. The chain has to support a clear audit trail from raw material to finished vehicle.

Anyone who completes a certification of origin must keep records and supporting documents for at least five years from the date the certification was completed.⁷ Importers carry their own recordkeeping duties. An importer that claims preferential treatment based on a producer’s certification must independently maintain records showing the good was not further processed in transit and that the certification is supported.

Verification and Penalties

Customs authorities from any USMCA country can verify a preferential tariff claim. Under the agreement’s origin procedures, the importing country’s customs administration may send a written questionnaire to the importer, exporter, or producer, or conduct an on-site verification visit at the exporter’s or producer’s premises.⁹

Timelines are tight. A producer or exporter who receives a written questionnaire has at least 30 days to respond. A request for a verification visit must be answered within 30 days, with a single postponement of up to 30 days available on request. Once customs has all necessary information, it must issue a written determination within 120 days, extendable by 90 days in exceptional cases.⁹

Failing to respond, or providing false or misleading information, carries real consequences. Under 19 U.S.C. § 1592, penalties scale with culpability:

Negligence: a civil penalty up to the lesser of the domestic value of the merchandise or two times the unpaid duties.
Gross negligence: a civil penalty up to the lesser of the domestic value or four times the unpaid duties.
Fraud: a civil penalty up to the full domestic value of the merchandise.

Interest accrues on unpaid duties from the date of liquidation at the prevailing rate under 26 U.S.C. § 6621.¹⁰ Producers who catch an error before customs does can make a prior disclosure, which reduces the penalty to the interest owed on the unpaid duties, provided the producer also tenders the full amount of those duties at the time of disclosure.

What’s Changing Next

The alternative staging regime, which temporarily lowered the LVC threshold to 25 percent for passenger vehicles and light trucks with a 10-percentage-point minimum for high-wage material and manufacturing, gave producers time to restructure supply chains.⁴ For passenger vehicles and light trucks, that window ran five years from the agreement’s July 1, 2020 entry into force and has now closed.¹¹ For heavy trucks, the alternative staging period runs seven years and can continue until mid-2027. After it expires, producers must meet the full standard-track requirements or pay MFN duties.

The agreement itself has a mandatory joint review in July 2026, at the sixth year of its 16-year term. If all three countries confirm they want to continue, USMCA extends for a fresh 16-year term. If any country declines, the three parties enter annual reviews for the remaining 10 years. If no agreement to extend is reached by year 16, USMCA terminates. The automotive rules of origin are expected to be one of the most contentious topics in that review, with the United States signaling interest in raising regional content thresholds further, adding U.S.-specific content requirements within the broader North American targets, and tightening treatment of vehicles with components from non-market economies.

1
Office of the United States Trade Representative. USMCA Chapter 4 – Rules of Origin
2
Congress.gov. USMCA Automotive Rules of Origin
3
U.S. International Trade Commission. USMCA Automotive Rules of Origin Motor Vehicle Producer Questionnaire
4
U.S. Department of Labor. United States-Mexico-Canada Agreement
5
eCFR. 29 CFR Part 810 – High-Wage Components of the Labor Value Content
6
Office of the United States Trade Representative. USMCA Automobiles and Automotive Parts
7
Office of the Law Revision Counsel. 19 U.S. Code 1508 – Recordkeeping
8
U.S. Customs and Border Protection. Certification of Origin Template
9
Office of the United States Trade Representative. USMCA Chapter 5 – Origin Procedures
10
Office of the Law Revision Counsel. 19 U.S. Code 1592 – Penalties for Fraud, Gross Negligence, and Negligence
11
Federal Register. Procedures for the Submission of Petitions by North American Producers of Passenger Vehicles