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

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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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