Trade Dispute Decision Could Move More Auto Manufacturing to Canada, Mexico

Canada and Mexico prevailed in a trade fight with the U.S. over vehicles moved across regional borders in a decision that could lead to more auto parts manufacturing in those countries, Bloomberg reported.

The ruling by a panel convened under the 2020 U.S.-Mexico-Canada Agreement issued a preliminary ruling last month that hasn’t yet been made public, the news service said. The three countries have 30 days to respond to it before its final version is issued.

Mexico initiated the challenge in January, Bloomberg reported, to resolve a dispute among the countries over how to calculate the percentage of a vehicle that originates collectively in the three countries. It and Canada say the USMCA allows for more regionally made parts to be covered by tax-free shipping than the U.S. desires, Bloomberg said.

Under the USMCA, which replaced the Clinton-era North American Free Trade Agreement, or NAFTA, at the behest of former President Donald Trump, 75% of a vehicle’s components are to originate in the region to qualify for tax exemption.

The preliminary panel ruling could incentivize manufacturers to make car parts and assemble more cars in Canada and Mexico, particularly the latter, where wages are far lower than those in the U.S., and especially for high-cost components, such as electric batteries, one expert told Bloomberg. He said that the decision could both lower vehicle costs and increase carmaker profits.

The ruling apparently grants leeway in the percentage calculation. The new trade agreement had increased prices of North American-made vehicles due to the difficulty of achieving set domestic content amounts. The U.S. pushed a stricter calculation method than Canada and Mexico to determine parts’ origin, making it harder for plants in those two countries to meet the 75% threshold. NAFTA required a lower, 62.5%, threshold for duty-free shipping.

Vehicles are the top manufactured product traded among the three partners, Bloomberg said.

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