Net Cost Method

The Net Cost Method is one of the two principal regional value content calculation methods used in U.S. FTAs. It is mandatory for certain product categories — most notably automotive goods under USMCA — and optional for many others.

The formula:

RVC = (Net Cost − Value of Non-Originating Materials) ÷ Net Cost × 100

Net Cost is total cost minus:

• Sales promotion, marketing, and after-sales service costs
• Royalties (royalties and license fees)
• Shipping and packing costs (packing costs)
• Non-allowable interest costs

Net Cost can be calculated using one of three methodologies under USMCA Article 4.5:

1. Method 1 — Calculate net cost of all goods produced by the producer, subtract non-allowable costs, then reasonably allocate to the specific good
2. Method 2 — Calculate total costs incurred for all goods produced, allocate to the specific good, then subtract allocated non-allowable costs
3. Method 3 — Reasonably allocate each cost component to the specific good and subtract non-allowable costs

The Net Cost method is mandatory for:

• Passenger vehicles, light trucks, and heavy trucks under USMCA (Article 4.5(b))
• Automotive parts as specified in the USMCA Annex 4-B
• Goods produced for export (where the producer is the exporter)

It is prohibited as the basis for:

• Goods where the producer has used Transaction Value Method
• Goods where reliable transaction value data is unavailable

Net Cost is preferred for automotive because it neutralizes high marketing/royalty costs that would otherwise inflate the Transaction Value Method's denominator and lower the effective RVC percentage. USMCA's automotive 75% RVC threshold is paired with the mandatory Net Cost method to ensure substantive North American value contribution.