U.S. and Mexico Can't Come Together On Light Vehicle Rules

Matt Posky
by Matt Posky

When the United States abandoned the North American Free Trade Agreement (NAFTA) to embrace the United States-Mexico-Canada Agreement (USMCA), it did so under the premise of crafting a better trade arrangement for itself. Established in 1994, NAFTA created a trilateral trade bloc that encouraged commerce between nations. But critics have accused it of encouraging the offshoring of U.S. jobs and dramatically suppressing wages — particularly within the automotive and manufacturing sectors.

Signed in 2018, and revised the following year, the USMCA was supposed to remedy those issues. But it’s been difficult to get all parties on board, especially when it comes to those persnickety rules of origin that stipulate how much of a vehicle’s hardware needs to be sourced from member nations.

U.S. Trade Representative Katherine Tai and Mexican Economy Minister Tatiana Clouthier were supposed to be figuring out a solution to the problem in Washington earlier this week. However, the pair parted ways on Thursday having failed to reach a compromise.

The conflict has been basically every since USMCA was introduced. Despite being signed into law by former U.S. President Donald Trump, former Mexican President Enrique Peña Nieto, and Canadian Prime Minister Justin Trudeau, the deal has been subject to continued negotiations. While phrasing is often tempered to be less inflammatory, the Canadian and Mexican governments really don’t seem to like the way the rules of origin are being calculated.

NAFTA required that 62.5 percent of a vehicle’s overall content be sourced from North America to be absolved of tariffs. But the USMCA upped the threshold to 75 percent regional content and is a little more particular in breaking down the individual components (e.g. engines, transmissions, etc.) that comprise the whole of the automobile. Canada and Mexico want more flexibility and have claimed that’s what they thought they were signing into when former president Donald Trump was still in office. Automotive News has been covering the topic consistently since 2017 and expanded on those demands in a recent article.

From AN:

For example, if a core part uses 75 percent regional content, and thus qualifies under that requirement for duty-free treatment, Mexico and Canada argue that 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, doesn’t want to permit rounding up, making it tougher to reach the duty-free threshold for the overall vehicle.

Mexico, together with Canada, has been considering filing a formal complaint against the U.S. under the year-old USMCA, which could result in a dispute panel to hear arguments for the nations, according to people familiar with the matter.

Matt Blunt, president of the American Automotive Policy Council, said the industry is “committed to making the USMCA a success.”

“We would urge the three countries to implement the agreement in a manner consistent with the negotiated outcomes,” he said in a statement to Automotive News. Blunt’s group represents General Motors, Ford Motor Co. and Stellantis.

Mexico’s Automotive Industry Association also wants the agreement implemented under the negotiated outcomes. However, it’s operating under the impression that talks resulted in something different than what the U.S. believes. While Canada has been quieter on the issue, officials have frequently signaled they align with Mexico and would like the ability to source parts from outside North America without the tariffs.

If the United States gives in, it effectively moves back toward some of the more contentious aspects of NAFTA it hoped to abandon with USMCA. But if it plays hardball and tells Canada and Mexico to either stick to the rules or kiss off, it’s running the risk of damaging trade relations and encouraging the automotive industry to simply abandon trying to go the duty-free route with some models. At least that’s the theory market analysts have been floating as negotiations continue.

But your author doesn’t really see that happening. Despite the United States’ nearest neighbors having other trading partners, it remains their biggest exporter and importer by a huge margin and would be probably wise to call their bluff. Defaulting to the World Trade Organization rules means adding a 2.5 percent tariff on passenger vehicles and open them up to the dreaded, 25-percent chicken tax — nullifying their ability to ship trucks into the country with any hope of profitability. While there would also be negative ramifications for the U.S., it seems to be holding the better hand overall and would be crazy to fold when one of the USMCA’s primary goals was to bring more manufacturing back into the country.

Trade Representative Tai has stated that the U.S. remains committed to the “full implementation of USMCA” and that her office would continue discussing the matter with Mexican Economy Minister Clouthier in the coming months.

[Image: Chess Ocampo/Shutterstock]

Matt Posky
Matt Posky

A staunch consumer advocate tracking industry trends and regulation. Before joining TTAC, Matt spent a decade working for marketing and research firms based in NYC. Clients included several of the world’s largest automakers, global tire brands, and aftermarket part suppliers. Dissatisfied with the corporate world and resentful of having to wear suits everyday, he pivoted to writing about cars. Since then, that man has become an ardent supporter of the right-to-repair movement, been interviewed on the auto industry by national radio broadcasts, driven more rental cars than anyone ever should, participated in amateur rallying events, and received the requisite minimum training as sanctioned by the SCCA. Handy with a wrench, Matt grew up surrounded by Detroit auto workers and managed to get a pizza delivery job before he was legally eligible. He later found himself driving box trucks through Manhattan, guaranteeing future sympathy for actual truckers. He continues to conduct research pertaining to the automotive sector as an independent contractor and has since moved back to his native Michigan, closer to where the cars are born. A contrarian, Matt claims to prefer understeer — stating that front and all-wheel drive vehicles cater best to his driving style.

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  • Jeff S Jeff S on Jul 26, 2021

    I just ordered and put a deposit on a 2022 Ford Maverick XLT truck which is made in Mexico. For the money it comes with a lot of stuff. I was told the earliest it would be delivered is the end of this year but it might be Spring of next year. I had a 1984 Chrysler 5th Avenue with a 318 V-8 that was made in Canada and it was a decent car. It is hard to find any vehicle made in the United States and if anything the US based manufacturers have less US and North American part content than the Japanese. We should be more concerned about having strong united North American manufacturing which raises the wages of all workers. Much rather support workers in Canada and Mexico than those in China.

    • See 1 previous
    • Lou_BC Lou_BC on Jul 26, 2021

      @slavuta There's also the "The Kogod Made in America Index" which tends to come up with different ratings that the carsdotcom index since both have different rating systems. The Kogod index has an interesting disclaimer on ratings that one should read and could help explain why countries and car companies are trying to negotiate rating changes.

  • Eng_alvarado90 Eng_alvarado90 on Jul 28, 2021

    I know I'm super late to the party but here I come. 1. Infiniti Q50. Sporty sedan, not that practical but you can have rear passengers from time to time. Peppy VQ engine, reliable, RWD, nice features and 2014-2015 models can be had within budget. 2. Acura TLX. K24 VTEC engine with great fuel economy, reliable, decently roomy and you can get any MY between 2015-2017 for the budget. 3. 2nd gen Chevy Volt. Technically it's a hatchback but doesn't look like one. The best fuel economy out of the bunch, very reliable powertrain, good features and very easy to park anywhere. It may not have the best interior quality, though.

  • 3-On-The-Tree Lou_BCsame here I grew up on 2-stroke dirt bikes had a 1985 Yamaha IT200 2-strokes then a 1977 Suzuki GT750 2-stroke 750 streetike fast forward to 2002 as a young flight school Lieutenant I bought a 2002 suzuki Hayabusa 1300 up in Huntsville Alabama. Still have that bike.
  • Milton Rented one for about a month. Very solid EV. Not as fun as my Polestar, but for a go to family car, solid. Practical EV ownership is only made possible with a home charger.
  • J Love mine, but the steering wheel blocks dashboard a bit, can't see turn signals nor headlights icons. They could use the upper corners of the screen for the turn signals. Mileage is much lower than shown too, disappointing
  • Aja8888 NO!
  • OrpheusSail I once did. My first four cars were American made, and through an odd set of circumstances surrounding a divorce, I wound up with a '95 Nissan Maxima which was fourteen years old and had about 150,000 miles on it.It was drove better, had an amazing engine, and was more reliable than any of my American cars. This included a new '95 GMC pickup that went through five alternators in under two years while the dealership insisted that there was no underlying electrical problem while they tried to run the clock on the warranty.That was the end of 'buy American'. I've bought from Honda and VW since, and I'll consider just about anything except American now.
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