The disagreement, which can cause serious problems for the industry in the region, lies in how to calculate the percentage of a vehicle that collectively comes from the three countries.
There is anger in the automotive sector due to the standards approved in the USMCA, the new trade agreement between the three North American countries. The United States disagrees with Mexico and Canada on the rules regarding the shipment of cars, while the companies and governments of these two countries are telling the Joe Biden government that it is putting the success of the trade pact at risk.
The disagreement lies in the way of calculating the percentage of a vehicle that collectively comes from the three countries, people familiar with the matter explain to Bloomberg who requested anonymity. The agreement went into effect last July, replacing the North American Free Trade Agreement, or NAFTA, but the new rules of origin are designed for gradual implementation over three years.
What is the conflict? The United States insists on establishing a stricter form than what Mexico and Canada believe they have agreed to for counting the origin of certain critical parts, such as engines, transmissions, and steering systems, the people said. That makes it difficult for plants in Mexico and Canada to meet the new threshold of 75% regional content, higher than the 62.5% contained in NAFTA, as a requirement to export vehicles without paying taxes.
For example, if a central party uses 75% regional content and therefore qualifies under this requirement, Mexico and Canada argue that the USMCA allows them to round the figure to 100%, for purposes of a broader calculation. of the general regional content of a car. The United States argues that 75% is the percentage that should be used in the broader calculation, making it difficult to reach the general tax-free threshold.
Adam Hodge, a spokesman for the US trade representative, said by email that the United States “remains committed to the regional value requirements that countries agreed to under the USMCA.” The press office for Mexico’s economy ministry declined to comment immediately. A spokesperson for Canada’s Commerce Minister Mary Ng also did not comment.
US Trade Representative Katherine Tai, appointed by President Joe Biden, repeatedly highlighted in recent weeks that her Administration adheres to a “worker-centered” trade policy and seeks friendly ties with the nation’s unions. Last month, it addressed the nation’s largest labor federation in an action that its director called a historic first.
United Auto Workers spokesman Brian Rothenberg said in an email that the group supports the stricter interpretation of the Biden Administration’s USMCA.
The USMCA rules
For Mexico, the Biden administration’s request is “surprising,” because the country believed the issue had been resolved in talks with then-President Donald Trump’s administration in 2018 and 2019, people close to the talks said. Cars are a central theme of the USMCA, and Mexico views the US requirement as an attempt by the government to renegotiate a key aspect of the agreement.
Mexico and Canada are considering filing a formal lawsuit against the United States under the USMCA, which has only been in effect for a year. This could result in a dispute panel hearing the countries’ arguments, the sources said.
Mexican Economy Secretary Tatiana Clouthier and Canadian Mary Ng discussed the conflict when they met in Mexico City last week. Clouthier plans to travel to Washington next week and address the issue.
If the rules become too onerous, automakers may choose to forgo duty-free exports and instead pay the 2.5% tariff charged by the United States under World Trade Organization rules, Flavio Volpe said, President of the Automotive Parts Manufacturers Association of Canada.
The Biden administration’s interpretation of the rules of origin “does not match the tripartite consensus on how the new rules would be administered,” Volpe said. “His interpretation would make it difficult for automakers to reach the agreed regional minimums of content value.”
The situation arises amid a difficult situation for the auto industry, which was forced to shut down last year due to the pandemic and is now grappling with a shortage of chips for vehicles.