The United States has just lost a trade-related US-Mexico-Canada Agreement (USMCA) dispute against Canada and Mexico. The disagreement came from US rules on cars shipped across regional borders, potentially offering more incentives to produce auto parts in those countries.
The panel that sided with Canada and Mexico was set up under the 2020 USMCA, and made a preliminary agreement in November 2022. All three nations have an opportunity to provide feedback before a final edition of the report is released.
According to a report from The Detroit News, Mexico first reached out to the panel for help back in January 2022. Ultimately, the disagreement stems from how each country calculates that percentage of a vehicle comes from each nation. Mexico and Canada believe that the USMCA, which replaced the previous North American Free Trade Agreement (NAFTA), allows for more regionally-produced parts to count towards duty-free shipping.
It’s worth noting that motor vehicles are the number-one product traded between the three nations.
Meanwhile, the US doesn’t believe this agreement needs to be changed and insists on the stricter process in order to count the origin of smaller, core parts in percentage calculations. By taking this path, it makes it harder for Mexico and Canada to meet the threshold of 75 percent regional content for duty-free trading.
For example, if a core part uses 75 percent regional content, and thus qualifies under that requirement for duty-free treatment, Mexico and Canada argued that the USMCA allows them to round the number up to 100 percent for the purposes of meeting a second, broader requirement for an entire car’s overall regional content. The U.S., however, didn’t want to permit rounding up, making it tougher to reach the duty-free threshold for the overall vehicle.
This development represents another dispute over the USMCA. Under the Inflation Reduction Act, EV buyers may be eligible for up $7,500 in tax credits if a majority of the parts used to build the vehicle are sourced and assembled in North America. While this may present as good news for American EV customers, Canadian Trade Minister Mary Ng believes the tax credit may have an adverse impact on the Canadian automotive industry, and may run afoul of the terms of the USMCA.
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