By on July 23, 2021

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]

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27 Comments on “U.S. and Mexico Can’t Come Together On Light Vehicle Rules...”

  • avatar

    I was shocked to find in my Japanese built Mazda6 brake calipers from China. I guess, it wasn’t 100% Japan content, only 95%

    • 0 avatar

      Welcome to the global economy. Imagine my surprise when I noticed that my Michelin snow tires have “made in Russia” printed on the sidewall.

      • 0 avatar

        My previous Equinox (assembled in Canada) had Michelins from Poland. There were the best set of tires I’ve ever had. The wet traction was superb, very quiet treads, and minimal wear at 36,000 miles.

  • avatar

    “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.”

    America is BACK

  • avatar

    Going back to the original AutoPact of 1965, any Canadian auto product was considered 100% American. I’m sure that’ deletion is causing some issues since Canadian manufacturing costs tend to be higher than the US (if socialized healthcare and other benefits not factored in).

    Mexico has been forced to improve wages and benefits to workers so that would be a crunch on their end. These rules make it harder to slip chinesium into the mix.

    I would not try to turn this into a country versus country thing since the manufacturers are lurking somewhere in the background lobbying for change to decrease costs and increase profits.

    The USMCA changed some things like autoparts content rules but for the most part Canada did not yield much beyond what would have been offered in the defunct TPP.

  • avatar

    The 2.5% is a freebie. Shut up and pay it, build it where and how you want.

    Mercedes builds Sprinter vans overseas, imports them and if they have rear windows/seats, pays 2.5%. For the cargo vans, Mercedes removes/reinstalls their drivetrains to avoid 25%.

    • 0 avatar

      @DenverMike – Ford did get nailed for the Transit Connect tariff. I’m not sure what came of that.

      A 2.5% tariff has been around forever and is easily absorbed into the cost of a vehicle. It could be one more nail in the coffin for domestic cars though.

      The Chicken tax could be circumnavigated. I don’t believe any pickups are currently made in Canada. Stelantis pickups are mostly hecho en Mexico. All of that is probably a red herring anyways. The USMCA was implemented a bit faster than it should have been to give the impression that the previous administration actually accomplished something of benefit.

      • 0 avatar

        Ford is currently paying 25% on every Transit Connect cargo, while the Feds still haven’t decided what legal action to take against Ford.

        • 0 avatar

          @DEnver – I found one article on it and Ford lost but is trying to appeal. DaimlerBenz and a few other companies are sh!tting their pants because they are next on the hit list once the Ford case is settled.

  • avatar

    When countries negotiate trade agreements, each one’s goal is to be able to sell anything and everything, regardless of origin, into the others duty free while maintaining prohibitive duties on everything coming in from the others. Covering this up requires complex rules that each negotiator hopes his counterparts won’t completely understand. Lou_BC’s comment about sneaking in chinesium is right on point.

    My retirement job was with a small distribution company that had a substantial export business. It was my duty to maintain records of the origin of everything exported. What an ordeal! Most of our suppliers didn’t know where there stuff came from. It’s feasible for a major industrial corporation which can afford a staff of experts on trade agreements backed up by engineers who can answer technical questions. It’s impossible for a shipping clerk in a 50-employee company. It works for small exporters only because tight regulation isn’t feasible.

  • avatar

    2017 Buick Cascada. There’s one on CarGurus for $22k with 35k miles.

    You’re welcome.

  • avatar

    I did some further research and some experts feel that the changes to content will have a net negative effect to all three countries. Obviously the three governments (especially the USA) touted this as a great agreement.

    “The economic impact assessment released by Global Affairs Canada (GAC) estimates that implementing USMCA “would secure GDP gains of $6.8 billion (US$5.1 billion), or 0.249%” over a 5 year period (p. 59). However, the report also notes that motor vehicle exports to the United States would decline by US$1.5 billion relative to the existing NAFTA. Why? The report cites the more stringent rules of origin (RoO) requirements of the USMCA as likely to lead to an increase in production costs.”

    But another study indicates:
    “A recently updated study by Dan Ciuriak, Ali Dadkhah, and Jingliang Xiao for the C.D. Howe Institute, a Canadian think tank, conducted an assessment of the USMCA, looking at the impact on all three economies. They found a negative impact on real GDP across all three NAFTA countries— a decline of -0.396% for Canada, -0.791% for Mexico, and -0.097% for the United States.”

    “Another study by Mary E. Burfisher, Frederic Lambert, and Troy D. Matheson from the International Monetary Fund (IMF) found a negligible impact on GDP (0.02% for Canada, -0.01% for Mexico, and 0.00% for the United States). They also note that “key provisions in USMCA would lead to diminished economic integration in North America, reducing trade among the three North American partners by more than US$4 billion (0.4 percent) while offering members a combined welfare gain of US$538 million” (P.23)

    “What we do know from existing studies is that the USMCA provides minor improvements to NAFTA, but that these gains could have been achieved had the United States stayed in the TPP. For Canada and Mexico, the benefits just don’t add up. Other than avoiding political confrontation with the United States, it is not clear that ratifying USMCA does anything for Canada or Mexico. In fact, it does not even reduce uncertainty, or the possibility for conflict with the United States.”

    It does appear that the USMCA might provide a slight improvement to NAFTA but it does appear that signing on to the TPP would have been the superior option and would have had the added benefit of corralling China.

    • 0 avatar
      Art Vandelay

      All they had to do on TPP was not act like they were hiding something. All that reading it in secret and not discussing it turned folks off.

      “Oh sure, I have no clue what’s in it and you won’t tell me but yeah…go ahead and vote for it”

      -No Voter Ever.

      • 0 avatar

        @Art – that’s part of the reason Hillary Clinton lost. She was seen as one of the arrogant elites, or more accurately was an arrogant elite. “Deplorables” to her was most of the electorate.

        • 0 avatar

          No one who runs for president isn’t an elite…be they a supposed Peanut Farmer, ex actor, or Real Estate Developer. They just need to hide that part to convince some folks. Hillary came across as the schoolteacher you didn’t like, and I voted for her.

          Shame, though, that it wasn’t her watch when COVID hit, a lot more folks would be alive today.

          • 0 avatar

            @speedlaw – perhaps “elite” was incorrect. Career bureaucrat is a better choice. I do agree that if she’d won there’d be a lot more people alive right now. Some say Bernie Sanders would have been the better liberal choice.

  • avatar

    This is probably completely irrelevant (sorry to waste your time):

    • 0 avatar

      @toolman – Perfect video for this discussion. Does USMCA bring jobs back to USA.? That’s part of the debate. It looks like it will hurt Canada in the auto sector but balance out elsewhere in the agreement. The 3 examples I cited indicate a mild improvement, status quo or a mild negative. The trillion dollar dragon in the corner of the room is China. That “ giant sucking sound” is there with China.
      I agree with Art as well. TPP was some top secret plan and the public was left in the dark. Other than hemming in China it would have done little to help the worker. Mind you, I don’t believe USMCA does much for the worker either.

  • avatar
    Arthur Dailey

    Auto manufacturing in Canada was successful under the Auto Pact, which was eventually ruled ‘illegal’ by the WTO.

    Despite production costs in Canada generally being higher than in the USA.

    Some of this was offset by the employer not being directly responsible for health care costs. These in particular for retirees became a major concern for manufacturers in the USA.

    Since NAFTA and its nominal successor auto manufacturing in Canada has suffered with a significant decrease in employment.

    Gone are plants in St Therese, Scarboro, Halifax, Bromont, St Thomas, the original Brampton assembly and there was even a Rootes Motors assembly plant in Scaroboro. Also numerous parts plants have closed in St Catharines, Mississauga, Ajax, and Barrie.

  • avatar

    Ah, my late and very un lamented Cadillac. (2010 CTS Sport). Sticker on door said “assembled with pride in Michigan”, but this was a Monday AM build after a hard partying holiday weekend. The wires all said “Made in China”, harnesses, single wires, all. The wheels had Made In China on the backs. The spark plugs were in an AC Delco box with Red White and Blue. On the back, tiny letters, made in Germany. Bosch was also to be found in a few other places under the hood. Oil Filters came from Poland. End Links, Korea. (Korea ?). Every time I bought a GM sourced part it was a mystery where the part came from, literally anywhere but the USA. In a Cadillac, supposedly the most American of cars….not a single US worker found a job save the guys in Michigan.

  • avatar

    Since no one else has said it how about either a Toyota 86 or a 350Z?

    Also I’m not a big Nissan fan but I thought I’d throw this out just for grins. How about something at the opposite end of the spectrum case in point a Nissan Murano CrossCabriolet?

    Let the rants begin…

  • avatar

    2015 Cadillac ELR. I know, I know. But this one is no Cimarron. The ELR is the prettiest car to come out of Detroit (Hamtramck) in recent memory, the interior is gorgeous, their steep depreciation curve has now bottomed out and is on the cusp of a rebound, they’re REALLY rare, economical, and hopefully share some mechanical parts with the more common Volt (but don’t tell anyone).
    And if you get your foot in the door now, you could get the ELR AND upgrade your electric for a charger…

  • avatar
    Jeff S

    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.

    • 0 avatar

      ” 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.”

      American-made index – 2021

      • 0 avatar

        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.

  • avatar

    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.

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