In arguably biggest test of new NAFTA, Canada and Mexico defeat U.S. in auto rules dispute
Dispute over content requirements seen as a litmus test of new trade pact
Canada, Mexico and auto companies have been declared the winners in arguably the most important trade dispute under the new NAFTA, landing the U.S. on the losing side in a case about calculating the origin of auto parts.
The long-expected decision was known for weeks to the parties involved, yet it was withheld from public release until after North American leaders appeared together at a summit this week in Mexico.
It involves small print with big consequences for the industry at the heart of the continental trade agreement: Automobiles.
At its core, the dispute was about how hard to push car companies to use parts from North America, at a time when countries are seeking to pry back manufacturing jobs.
The specific case involved two conflicting methodologies for calculating the origins of a car's parts: One stricter, one easier.
Americans took a hard line. The U.S. wanted the toughest interpretation of the rules, which would force cars to include more North American parts to avoid a tariff.
Mexico fired off a suit against the U.S., calling its method damaging, costly to companies and counterproductive to the continent's car industry.
Canada joined the suit. Car companies eagerly supported the suit. And the complainants ultimately won.
Canada, Mexico and the auto industry are now celebrating the ruling from a five-member international panel.
In a decision declared Dec. 14, but only released Wednesday, the panel said that the United States breached the new Canada-U.S.-Mexico agreement (CUSMA) when it tried imposing new rules.
The ruling pointed to a piece of evidence submitted by Canada: an email sent by a U.S. official that supported the complainants' claim that all three countries originally understood they were agreeing to the simpler formula.
"Today's decision is a good decision for the industry," International Trade Minister Mary Ng told reporters in Mexico City. "It's what we negotiated.… Clarity in the rules — it's what today's decision provides."
It's the second win for Canada under the new trade agreement; Canada also won a case on solar panels, though it was the main loser in a dairy dispute with the U.S.
The verdict comes as little surprise. The countries have been aware of it for weeks and, while it was still officially confidential, a Mexican cabinet minister blurted it out to a newspaper there late last year.
The trade community is now awaiting U.S. reaction, with its eagerly anticipated response being seen as an early litmus test of the reliability of the CUSMA dispute system.
Early reaction was vague from the Office of the U.S. Trade Representative (USTR): It did not spell out its next move, but called the decision disappointing.
"[This] could result in less North American content in automobiles, less investment across the region and fewer American jobs," said the U.S. statement.
"We are reviewing the report and considering next steps. We will engage Mexico and Canada on a possible resolution."
Background of the case
The dispute stemmed from the aftermath of the new NAFTA, originally reached in 2018 under the Trump administration.
The new trade pact requires more parts from North America to avoid a tariff, part of Trump's protectionist push for more domestic manufacturing.
Yet the U.S. stunned its partners and the car companies after the deal was already signed: It insisted upon an unexpectedly strict interpretation of the terms.
Imagine a car part qualifies as North American because 85 per cent of its sub-components come from this continent. Under the pact, that part faces no tariff.
But then there's a subsequent, bigger calculation for the entire car: Does the vehicle, as a whole, have enough North American content to avoid a tariff?
In making that calculation, when adding up parts of the car, how much does that smaller piece counts toward the car's total amount of North American content?
The U.S. argued it should be 85 per cent. Others insisted on the so-called roll-up method: if that piece is deemed North American, then it should count fully as 100 per cent North American.
They say they were caught off-guard when, long after the deal was signed, the U.S. suddenly insisted on its tougher formula.
Mexico's suit complained that this was not part of the agreement and represented an absurdly complicated regulatory burden.
It said car companies don't need to be brow-beaten into building cars here when they've already invested massively in recent years in new North American production: "This development is particularly nonsensical [now]."
Canada: U.S. was trying to sneak in changes
Canada's submission includes correspondence as evidence that the parties were stunned when the U.S. presented this new formula in 2020, after the pact had already taken effect.
"This reinterpretation came as a surprise to Canada, Mexico and the entire automotive industry," said the Canadian submission.
The Canadian submission also implies the Americans may have been sneakily, belatedly, trying to tilt the deal in their favour. It argues that making trade more complicated benefits manufacturing in the country with the largest domestic market.
If it becomes more difficult to ship across borders, the Canadian suit argues, that's an incentive for companies to simply produce in the market with the most customers: in this case, the U.S.
The Americans argued that their formula would help North America's workers versus those overseas.
The U.S. submission said the stricter formula would result in significantly more North American content per car — anywhere between eight and 33 per cent.
It said the other countries' looser formula means billions of dollars in lost manufacturing opportunities each year on this continent.
Group blasts Canada, Mexico case as anti-worker
One American-based group that promotes domestic manufacturing expressed frustration that Mexico and Canada launched this case.
Charles Benoit, a Canadian-born trade lawyer with the group Coalition for a Prosperous America, said those two countries sided with multinational companies over workers here.
"It's disappointing," Benoit said. "Mexico and Canada's trade ministries didn't stop to think about their own supply-chain producers and workers before bringing this case on behalf of global automakers."
He voiced concern that this means more imports from abroad, including from China, undermining efforts to revive manufacturing.
But it's complicated.
Industry players warn that making compliance more expensive holds unwanted negative consequences. They say more onerous rules would just force car companies to produce offshore to remain cost-competitive.
At some point, manufacturers would conclude it's cheaper to bring parts from overseas and pay the tariff, said Flavio Volpe, head of AMPA, Canada's auto-parts lobby group.
Auto industry: U.S. demands would have driven industry away
The tariff rate for cars is 2.5 per cent in the U.S. and 6.1 per cent in Canada.
The new pact is already a massive win for this continent's parts manufacturers, said Volpe, as evidenced by the investment spree now happening in North American plants.
The U.S.-imposed requirements could have undermined this, he said, noting the panel's verdict is good for North America.
"It's a win for the automotive parts sector in all three countries. And also provides a win for stability in the new USMCA," Volpe said.
"Instead of saying, 'Hey, two years into the USMCA, we have the U.S. reinterpreting it and changing the deal.'"
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With file from Janyce McGregor in Mexico City