What impact could the US-Mexico car parts dispute have on the USMCA?

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The USMCA is at an impasse with regard to auto parts, after the Biden administration took a stricter stance on calculating rules of origin than Trump.


The US and Mexico have failed to resolve a trade dispute concerning rules of origin for automotive parts, which could have significant implications for the implementation of the United States–Mexico–Canada Agreement (USMCA) in the sector. So what is the issue, how is Canada involved and what could it mean for the agreement?

With the Biden administration in the US taking a different approach to that of President Trump, Mexico and Canada are feeling the shift. If the differences in methods of operating can’t be resolved, the USMCA could be dead in the water before it’s properly begun.

US-Mexico car parts dispute

The dispute between the US and Mexico centers around rules of origin that enable cars manufactured in North America to be treated without duties when imported into Mexico. This has been possible under the USMCA, which came into effect just over a year ago.

When it was signed by former US president Donald Trump, the USMCA replaced the North American Free Trade Agreement (NAFTA), raising the regional content requirement for vehicles from 62.5 per cent to 75 per cent.

Officials in Mexico are not happy with the way the rules are being used in practice, however, and Tatiana Clouthier, economy minister for Mexico, has spoken out. She said: "We believe that the rules of origin have not been interpreted the way it was agreed at the moment we signed the agreement."

Ongoing talks

Despite Ms Clouthier meeting with US trade representative Katherine Tai last week, the issue has not been resolved and more talks are required to ensure the USMCA is followed in a way both parties are comfortable with.

The new system was designed to be phased in over time and a number of teething problems are yet to be ironed out. The US’ methods for calculating the origins of certain car parts are stricter than those of Mexico and Canada, making it harder for the latter two countries to meet the 75 per cent threshold.

A number of core parts, such as engines, transmissions and steering systems are being treated differently by the parties involved, resulting in disparate calculations. Mexico and Canada are seeking to be allowed to round up core parts to meet a second, wider requirement for an entire car’s overall regional content, but the US does not permit such rounding up.

Impact on the USMCA

When Trump and his trade representative Robert Lighthizer agreed to the USMCA, it was seen as a significant boon for the auto industry in the US. In the preceding years under NAFTA, American car manufacturers became increasingly reliant on suppliers and assembly plants in Mexico and Canada.

Ms Cloutheir warned in a statement that "not abiding by USMCA rules may potentially disrupt the operations of the North America automotive industry and will result in unnecessary burdens" for manufacturers, as well as "reduced competitiveness".

In a statement after the most recent talks, Ms Tai said: "The United States remains committed to the full implementation of the USMCA, including the strong auto rules of origin." How this will work in practice, with both sides coming to an agreement, is yet to be seen.

The Biden administration’s stance

One of the contributing factors to the dispute is what is seen as a change in stance by the US since the Biden administration took over. Mexico believes the new regime is trying to rewrite the rule on auto parts, despite it having been a key element of the USMCA deal, which was settled under Trump.

Ms Tai was appointed by President Biden and has made it clear the administration is keen to be on friendly terms with the nation’s trade unions. This has translated as a worker-centered trade policy and a stricter interpretation of the USMCA, which has been welcomed by United Auto Workers, the biggest car union in the US.

Moving forward

Things remain stagnant at present, with Ms Clouthier stating: “We need more dialogue as to understand the problems that can be caused if the interpretation continues to be the one that the previous administration has taken. That’s where we are at this moment.”

Mexico and Canada remain on the same page in opposition to the US’ approach to calculations and may launch a formal complaint. If they do so, then a dispute panel could be convened to hear the arguments from each of the nations involved.

If the rules become too convoluted, automakers may decide not to go through the process of applying for duty-free treatment. Flavio Volpe, president of Canada’s Automotive Parts Manufacturers’ Association, has pointed out that this could mean the industry ends up paying tariffs charged by the US under World Trade Organization (WTO) rules.

Rendering the free trade deal irrelevant would allow the US to implement a 2.5 per cent tariff on passenger trucks and 25 per cent charge on light trucks from its neighbors. As motor vehicles are the most frequently traded manufactured product between the US, Mexico and Canada, it would have a significant impact on relations and the economies of all three countries.