Line workers assemble a Lexus SUV at Toyota’s plant in Cambridge, Ont., in 2015. A USMCA dispute panel ruling upheld regional content rules agreed upon in the NAFTA renegotiation that give companies more incentives to make auto parts for North America vehicles in Canada and Mexico. Aaron Lynette
Arbitration under the USMCA has ruled in favor of Canada and Mexico in a dispute with the United States over regional content rules for automobiles, a decision that comes as a relief to one of that country’s largest and most critical manufacturing sectors.
The dispute panel’s ruling gives companies more incentives to make auto parts for North American vehicles in Canada and Mexico while respecting the regional content rules agreed upon in the NAFTA deal renegotiation. The USMCA (United States-Mexico-Canada Agreement) entered into force on July 1, 2020.
International Trade Minister Mary Ng, in Mexico City with Prime Minister Justin Trudeau for a summit of North American leaders and bilateral talks with Mexico, welcomed the dispute panel’s decision. She said it “provides flexibility for automakers in Canada, Mexico and the United States” in meeting the content threshold to receive an exemption from foreign vehicle tariffs.
The Canadian auto parts industry employs 100,000 people in parts production, as well as in the software and supplies needed for production. It produces about $35 billion worth of products annually, almost half of which is exported. About 95 percent of these exports go to the United States.
The automatic content decision was initially leaked in December via a Mexican government tweet – which was later deleted – but on Wednesday it was publicly confirmed and the full text of the dispute panel’s ruling was revealed.
The decision is “disappointing,” said Adam Hodge, a spokesman for the office of the United States Trade Representative, adding that it could lead to “fewer American jobs.”
Under the USMCA, the United States must now agree with Canada and Mexico on how to implement the panel’s decision or face possible retaliatory tariffs.
“We are reviewing the report and considering next steps,” Mr Hodge said. The USTR will now “engage Mexico and Canada in a possible resolution of the dispute,” he added.
Flavio Volpe, president of the Canadian Auto Parts Manufacturers Association, said the decision is important because it protects investment decisions made based on the original interpretation of what constitutes a North American-made car that qualifies for the duty exemption on foreign-made vehicles. .
“We agreed on the terms after three years of negotiations, which worked and were the new ones [Biden] The administration reinterpreted those rules, which we thought would hurt some of the auto parts sourcing decisions, Mr. Volpe said.
Under the USMCA, 75 percent of a car’s components must originate in North America to qualify for tax-free status, but the United States disagrees on how to calculate that number.
Mexico and Canada said that if a “major part,” such as the engine or transmission, has 75 percent regional content, the USMCA allows that number to be rounded up to 100 percent when calculating the broader regional whole-car content requirement.
The United States said that the contents of the “main part” should not be rounded up when determining the contents of the entire car.
If the US position were upheld, it could hurt auto parts production in Canada and Mexico, as automakers may have found the higher content threshold in North America too expensive to meet. Instead, Mr. Volpe said, carmakers could decide to drop the content requirement, use more offshore parts and instead pay the tariff on foreign-made cars.
Mr. Volpe said the ruling is also important because it sends a signal that the USMCA’s dispute settlement process is impartial and not biased in favor of the United States. “The USMCA needs to work and we need to be able to rely on it – and that includes resolving disputes.”
He said he expects the U.S. to comply with the decision because he believes the Biden administration can say it “went down” on an industry and did its best.
The decision came a day after the conclusion of the North American Leaders Summit (also called the Three Friends Summit). Mr. Trudeau remained in Mexico City for one-on-one meetings with Mexican President Andres Manuel Lopez Obrador.
Mr. Trudeau, speaking before the automatic content decision was unveiled, used a speech to a business audience at the city’s Centro University to defend the USMCA and call for a retreat from protectionism.
“Of course, like all friends, we will have disagreements from time to time,” Mr. Trudeau told the audience. “But overall things are working very well.”
It’s been less than three years since a new NAFTA agreement went into effect, and disputes have multiplied. These include automatic content rules, access to Canada’s protectionist dairy system and whether Mexico discriminates against Canadian and US investors by granting preferential treatment in its energy market to its state oil company and national energy company. Another controversy is brewing over Mr López Obrador’s plan to ban imports of genetically modified maize in 2024.
Hanging over the free trade pact between the three countries is the mandatory review of the USMCA, which was enshrined in the agreement, meaning all parties must agree to extend the deal until 2026. Failure to do so would create uncertainty due to annual reviews for the past 10 years or until all parties agree to extend the deal for another 16-year term.
Mr. Trudeau said the three countries must resist the urge to protect their national industries from competition. “Of course, when the world is uncertain, it’s human nature to look inward. To feel the pull of protectionist urges. To want to cower and let the storm pass,” he said.
“But as governments and leaders, we must be wise enough to recognize that pandering to these voices is not the way to overcome our challenges. Putting up trade barriers means putting up barriers to growth. And that doesn’t help anyone.”
With reports from Reuters
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