Mexico and Canada have won their dispute over the U.S. interpretation of content requirements for autos under the new North American trade pact, a dispute panel decreed on Wednesday, a decision that benefits parts makers north and south of the U.S. border.
A year ago Mexico and Canada lodged a complaint against the United States over how to implement automotive-sector content rules under the United States-Mexico-Canada (USMCA) free trade agreement, which took effect in 2021.
The U.S. interpretation of the requirements is “inconsistent” with the USMCA, the panel said in its ruling.
“The decision is good for Canada and Mexico,” said Flavio Volpe, president of Canada’s Automotive Parts Manufacturers’ Association.
Canada “is glad to see that the dispute settlement mechanisms in place are supporting our rights and obligations negotiated in USMCA,” Canadian Trade Minister Mary Ng said in a statement.
“This is excellent news,” said Tatiana Clouthier, Mexico’s former economy minister in a video on Twitter. “That helps the entire automotive industry in the North American region enormously.”
The ruling is “disappointing,” said Adam Hodge, a spokesperson for the United States Trade Representative’s office, adding that the ruling could lead to “fewer American jobs”.
Under the USMCA, the United States must now agree with Mexico and Canada on how to implement the panel decision, or face potential retaliatory tariffs.
“We are reviewing the report and considering the next steps,” Hodge said. The USTR will now “engage Mexico and Canada on a possible resolution to the dispute,” Hodge said.
“In the coming days, Mexico will begin a process of dialogue and cooperation with its trading partners,” Mexico’s economy ministry said in a statement after the ruling.
The decision was made public amid a different USMCA dispute focused on energy that has pitted Canada and the United States against Mexico. Ottawa and Washington contend Mexico’s energy policies are disadvantaging firms in the U.S. and Canada, while Mexico has upheld its policies and said it has violated no laws.
Under USMCA, 75% of a vehicle’s components must come from North America to be eligible for tax-free status, but the United States disagrees with how to compute that figure.
Canada and Mexico said if a “core part,” such as the engine or transmission, has 75% regional content, the USMCA permits that number to be rounded up to 100% when determining the broader requirement for an entire car’s regional content.
The United States said “core part” content should not be rounded up when calculating the content of the entire car. Volpe said the ruling also is important because it shows that disagreements can be resolved under the rules of the new trade pact.
“It shows that the dispute-resolution vehicle within the USMCA works,” Volpe said.