January 23, 2023

Canada, Mexico Win Trade Dispute With United States Over Auto Content Rules

As Connecting the Dots readers may recall, last year the governments of Canada and Mexico filed a complaint against the U.S. government regarding how to apply automotive-sector content requirements that were put into place by the United States-Mexico-Canada (USMCA) free trade agreement that went into effect in 2020.

Those two countries won the first round in that case when, on January 11, a USMCA trade panel ruled in their favor.

As Reuters explained, under the USMCA, 75 percent of a vehicle’s components must originate in North America in order to qualify for tax-free status. That ratio was a major change from the North American Free Trade Agreement and was intended to boost U.S. auto sector manufacturing. The rules were supposed to go into effect on July 1, 2025, but before they could the governments of Mexico and Canada sought clarification on how the 75 percent ratio would be calculated.

Trade representatives from the two countries argued that if a “core part” like an engine or transmission has 75 percent regional content, the USMCA allows that number to be rounded up to 100 percent when calculating the broader requirement that an entire car’s regional content be 75 percent North American-made. The United States disagreed, saying the “core part” content should not be rounded up when determining the content of the entire car.

Canadian Trade Minister Mary Ng praised the ruling, arguing it reaffirms “our understanding of the negotiated outcome on the rules of origin for automotive products.” In a statement, the Office of the U.S. Trade Representative (USTR) called the ruling “disappointing” and warned it could result in “less North American content in automobiles, less investment across the region and fewer American jobs.”

The ruling means that the United States must use Mexico’s and Canada’s methods to calculate regional content, or face retaliatory tariffs. However, the USTR said it is considering its next move and will discuss a possible resolution with Mexico and Canada. Read more here.

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