Industry seeks quick USMCA fight resolution

WASHINGTON — An escalating quarrel over how the U.S. is interpreting vehicle content rules under North America's trade pact could be resolved this year, erasing some uncertainty as automakers try to meet the deal's more stringent requirements.

Canada last week joined Mexico in its request to form a dispute settlement panel that would address the U.S. interpretation of the automotive rules of origin under the United States-Mexico-Canada Agreement. The trade pact replaced the North American Free Trade Agreement in July 2020.

Mexico filed the complaint this month after consultations among the three countries failed to resolve disagreements on how to apply the vehicle content requirements.

The panel, which likely would be made up of experts from each country, would be expected to issue a report this summer, according to Canada Trade Minister Mary Ng. While that timeline could be extended, Autos Drive America CEO Jennifer Safavian said she's hopeful there will be a resolution this year.

"The clarity is needed to ensure that we continue to have a successful North American automotive industry," Safavian, whose group represents the U.S. operations of international automakers such as Hyundai, Toyota and Volkswagen, told Automotive News.

Under USMCA, significant changes were made to the auto-specific rules of origin, including a requirement that 75 percent of auto content for passenger vehicles and light trucks be made in North America to avoid tariffs, compared with the previous trade pact's 62.5 percent.

At issue is the stricter interpretation of those rules by the U.S., specifically, how it is calculating regional value content, or RVC, for core parts — components such as engines, transmissions and suspension systems — and how those parts should count toward the vehicle's RVC.

Canada and Mexico, in their interpretation, say that if a core part meets the 75 percent regional content threshold, then that part can count as 100 percent originating in North America when determining the vehicle's overall RVC.

The U.S., however, considers the regional content for core parts and vehicles as separate calculations. For instance, if an engine meets the 75 percent threshold, then only 75 percent is counted toward the vehicle's overall RVC.

Matt Blunt, president of the American Automotive Policy Council, said his group — which represents Ford, General Motors and Stellantis — believes the Canadian and Mexican interpretation is what was negotiated and explained to the industry.

"The details matter, and industry had an understanding of how the rule of origin would work, as did Canada and Mexico," Blunt said. "Certainly, our hope would be that the outcome of this process will ensure that the USMCA is implemented in accordance with the negotiated outcomes ... and that it can be a success."

Adam Hodge, a spokesman for the Office of the U.S. Trade Representative, said the agency is confident that the U.S. interpretation is consistent with the trade pact.

"Any interpretation of the automotive rules of origin that reduces the regional value content of a vehicle produced in North America runs counter to the goals of attracting new investment, creating well-paying manufacturing jobs and ensuring USMCA parties are the ones that benefit from the duty-free treatment for meeting these new rules," he said in an emailed statement to Automotive News.

Bernard Swiecki, director of research at the Center for Automotive Research in Ann Arbor, Mich., said the stalemate puts companies in "regulatory ambiguity."

"The longer that this goes without a consensus, the risk is that companies essentially decide it's safer not to try to comply," he said, citing the 2.5 percent U.S. tariff on passenger vehicles and 25 percent on light trucks, including pickups and SUVs. Automakers may weigh potentially steeper compliance costs against the cost of the tariffs.

If automakers choose not to comply, Swiecki added, that could mean less U.S. content in vehicles produced in Canada and Mexico if they opt to source parts from lower-cost countries.

"The potential for unintended consequences is enormous," he said.