Canada and Mexico won a dispute with the U.S. over vehicles traded across borders in a ruling that could result in more car parts manufacturing in those countries.

A panel issued the ruling Wednesday in an early decision under the United States-Mexico-Canada Agreement, or USMCA, that took effect in 2020. It termed U.S. interpretation of rules on vehicle content inconsistent with the free-trade agreement.

Canada and Mexico filed a complaint against the U.S. a year ago, saying it was incorrectly applying USMCA rules on the content of vehicles. The U.S. must now align with its North American trade partners on how to apply the ruling in order to avoid potential tariffs.

The USMCA, which replaced the Clinton-era North American Free Trade Agreement, or NAFTA, requires that 75% of a vehicle’s components originate on the continent to achieve duty-free shipping. The panel decided that the more stringent U.S. interpretation of the rule breached the agreement.

At least some experts say the decision could motivate manufacturers to make car parts and assemble more vehicles in Canada and Mexico, especially the latter, where wages pale in comparison to those in the U.S., and particularly for high-cost components, such as electric-vehicle batteries. It could lower vehicles’ costs and increase carmaker profits.

Adam Hodge, a representative for U.S. Trade Representative Katherine Tai, said the ruling "could result in less North American content in automobiles, less investment across the region, and fewer American jobs.”

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