Mexico and Canada won a trade dispute with the US over cars shipped across regional borders, providing automakers more incentive to make vehicles in those nations.
(Bloomberg) — Mexico and Canada won a trade dispute with the US over cars shipped across regional borders, providing automakers more incentive to make vehicles in those nations.
The decision was included in a final report released Wednesday by a five-member dispute-resolution panel set up under the 2020 US-Mexico-Canada Agreement. The panel made its preliminary ruling in November, but it wasn’t released until this week, after the leaders of the three countries met in Mexico City.
Arbitrators “concluded that the United States has breached” an article of the USMCA, the panel said.
The decision will encourage companies to invest more in Mexico and Canada to get the benefit of exporting duty-free to the US and create more jobs overall in North America, said Luz Maria de la Mora, who as Mexico’s undersecretary of economy for trade helped bring the complaint challenging the US interpretation of the trade pact. Auto parts often cross the borders between the countries many times before a vehicle is completed.
The US position risked making the rules so cumbersome that automakers would forgo applying for duty-free treatment and instead pay the 2.5% tariff that the US charges under World Trade Organization rules, thus discouraging regional investment and defeating the purpose of having a free-trade agreement, she said.
“The administrative cost of the new rules of origin requirement is very costly” compared with the earlier North American Free Trade Agreement, or Nafta, de La Mora, who left the ministry in October, said in an interview. “If the US had prevailed, then I’m sure that for many companies it would have been not worthwhile to even comply” with the USMCA.
US Trade Representative Katherine Tai’s office called the ruling “disappointing.” In an email, spokesman Adam Hodge said that the US is “reviewing the report and considering next steps,” vowing to “engage Mexico and Canada on a possible resolution to the dispute, including the implications of the panel’s findings for investment in the region.”
Mexico sought the panel’s help last January, with Canada joining days later, to resolve a dispute over how to determine the origin a vehicle that comes collectively from the three countries under the USMCA, which replaced the North American Free Trade Agreement, also known as Nafta.
Mexico and Canada argued USMCA stipulates that more regionally produced parts should count toward duty-free shipping than the US wants to allow for motor vehicles, the top manufactured product traded between them.
“This is the understanding that Canada had all the way along,” Canadian Trade Minister Mary Ng told reporters in Mexico City. “It’s what we negotiated.”
The release of the ruling comes a day after the heads of the three nations gathered for the North American Leaders’ Summit, or more informally the “Three Amigos,” which resulted in agreement to cooperate on semiconductor development and climate change.
The countries still have points of friction, particularly energy. The US and Canada have complained about aspects of Mexico’s electricity policy, which they say raises prices for factories that are key to the region’s competitiveness. The US also has complained about Mexico’s plans to ban imports of American genetically modified corn, potentially shutting off the biggest market for America’s farmers.
Content Calculations
In the autos dispute, the US had insisted on a strict method to tally the origin of core parts, including engines, in the overall calculation of a car’s content. That US interpretation would have made it harder for plants in Mexico and Canada to meet the new duty-free threshold of 75% regional content, up from 62.5% under Nafta.
For example, if a core part uses 75% regional content, Mexico and Canada argued that the USMCA allows them to round up to 100% for the purposes of meeting the second, broader requirement for a car’s regional content. The US, however, didn’t want to permit rounding up, which would have made it tougher to reach the duty-free threshold.
The US Chamber of Commerce, the biggest American business lobbying group, “welcomes this ruling and the certainty it will provide for industry across the U.S., Canada, and Mexico,” Myron Brilliant, vice president and head of international affairs, said in a statement. “We urge the administration to quickly implement the panel ruling — as we urge all three parties to meet their USMCA commitments, including in areas such as energy and agriculture that are also under scrutiny.”
The United Steelworkers criticized the decision, saying it hurts workers across North America and represents a victory for Chinese and other foreign producers. The union said the decision makes it harder to trust new tariff-reduction deals.
“Rules governing the origin of automotive components are important to ensuring that products that qualify for duty-free status are truly supporting local jobs rather than fueling a race to the bottom on wages and working conditions,” Tom Conway, the president of the USW, said in a statement.
–With assistance from Joe Deaux and Derek Decloet.
(Updates with comments from former Mexican undersecretary of economy starting in fourth paragraph.)
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