This week, Mexico and Canada won a major lawsuit against the United States before an international trade panel. At issue was the question of “how much of a car needs to be made in North America to be considered North American”—and thus receive tariff-free treatment through the United States-Mexico-Canada Agreement (USMCA).
According to the Office of the U.S. Trade Representative, the ruling in favor of Mexico and Canada will mean an estimated 8% to 33% loss of North American content in cars produced by the three countries. That’s a major defeat for America’s auto parts manufacturers and their workers. But it also hurts supply chains and workers throughout North America—something Mexico and Canada should have considered before bringing a trade case on behalf of global auto producers.
Under the longstanding North American Free Trade Agreement (NAFTA), 62.5% of a car was required to be made in North America to receive tariff-free treatment in the U.S. But this ended up being watered-down substantially because NAFTA contained a “deeming” provision—if a car part wasn’t specifically listed in the agreement, automakers could “deem” it as being made in North America.
The Trump administration’s subsequent renegotiation of NAFTA into the new “USMCA” marked an encouraging step for North American auto parts producers and their workers—since it raised the North American content threshold to a more robust 75%. It also got rid of the “deeming” provision and added a rule requiring hourly auto wages of at least $16. Additionally, it mandated that 70% of the steel and aluminum in a car be sourced from North America, and that seven core vehicle parts also meet North American content requirements.
These new rules were due to go into effect on July 1, 2025. However, Mexico and Canada saw an opportunity to weaken the core parts rule—and keep sourcing cheaper auto parts from overseas. In January, they sued the United States to weaken the content rules for core vehicle parts.
In legal filings, the United States estimated that the Mexico-Canada proposal to source more imports from overseas auto suppliers would “amount to a loss of more than $7 billion USD in North American manufacturing.”
This was a blatant repudiation of the North American content provisions contained in the USMCA. And it’s astounding that Mexico would even take such a self-serving step. In 2021, for example, Mexico sold more than 2 million cars to the United States. But in return, it bought less than 100,000 from the U.S. And just a few months ago, Congress even extended generous consumer tax incentives specifically to cars assembled in Mexico and Canada.
Now, the USMCA auto case has been decided in favor of Mexico and Canada. This could mean lost market share for America’s already struggling auto parts producers. In response, the Biden administration should use America’s overwhelming market leverage—and tell Mexico and Canada that the United States will not be honoring the decision to weaken USMCA automotive rules of origin. The administration should also invoke the USMCA’s “essential security” provision to stop any further increases in America’s trade deficit for new passenger vehicles.
The rationale for this move has already been established. In 2019, the U.S. Secretary of Commerce reported that “the impact of excessive imports on the domestic automobile and automobile parts industry and the serious effects resulting from the consequent displacement of production in the United States is causing a weakening of our internal economy that may impair the national security.”
The United States must stand up for its domestic auto parts industry, particular when vehicle imports from Mexico have been displacing American production for more than a decade. The Biden Administration should use its legal authority under national security considerations to control the volume of auto imports—and draw a hard line on the trade deficit it’s willing to tolerate in this critical industry.
Charles Benoit is trade counsel of the Coalition for a Prosperous America. Twitter: @charles_benoit
Editor's note (12/14/22): IndustryWeek's comments feature is temporarily disabled for technical reasons, but reader Scott Paradise sent this response to Benoit's article:
I work in the Automotive Supply industry at a small Tier I supplier. My prior role was at a large global Tier I supplier. Our reliance on NAFTA for business planning purposes was critical to decision-making for long term investments. I equate it to stopping a freighter at sea. It does not happen quickly. The sudden change to USMCA was painful and costly to the supply base and ultimately is reflected in increased costs.
When we in the industry heard that the administration was going to rewrite the NAFTA agreement, there was a sense of significant uncertainty that would lead to increased costs. The administration was being pushed by organized labor, steel and aluminum industries and protectionist political forces to do something. There was no doubt that NAFTA was old and needed revising, however, I would argue they went too far. The rules related to software did not keep up with the pace of innovation/change. Government had little idea that in the auto parts business we are making financial commitments for new plants and equipment that have 1-3 year or more lead times.
Government did agree to a phase-in period. Unfortunately, projects that were approved and committed to based on the NAFTA rules of engagement were a “done deal.” There was no stopping most of the big projects or moving them to the USA. In addition, there was never going to be a landslide of business returning to the USA from existing facilities outside the country.
I’m all in for supporting the American worker. Tariffs are not the answer to not being competitive. Increased investment in new technologies is what was/is needed. In addition, we compete in the global marketplace in the automotive space, with the two largest blocks being the EU and Asia. They each have low-cost countries in which to source certain products from that provide them with an advantage. The NA block consists of all three countries (USA/Canada/Mexico) competing against the other two blocks. We need a low-cost country (Mexico) as part of our group to compete.