Mexico, Canada win trade ruling against US on duty free cars

Mexico and Canada won a trade dispute with the US over cars shipped across regional borders, providing automakers more incentive to make vehicles in those nations.

The decision was included in a final report released Wednesday by a five-member dispute-resolution panel set up under the 2020 US-Mexico-Canada Agreement. The panel made its preliminary ruling in November, but it wasn’t released until this week, after the leaders of the three countries met in Mexico City.  

Arbitrators “concluded that the United States has breached” an article of the USMCA, the panel said. 

US Trade Representative Katherine Tai’s office called the ruling “disappointing,” arguing it “could result in less North American content in automobiles, less investment across the region and fewer American jobs.”

Spokesman Adam Hodge added by email that the US is “reviewing the report and considering next steps,” vowing to “engage Mexico and Canada on a possible resolution to the dispute, including the implications of the panel’s findings for investment in the region.”

Mexico sought the panel’s help last January, with Canada joining days later, to resolve a dispute over how to determine the origin a vehicle that comes collectively from the three countries under the USMCA, which replaced the North American Free Trade Agreement, also known as Nafta.

Mexico and Canada argued USMCA stipulates that more regionally produced parts should count toward duty-free shipping than the US wants to allow for motor vehicles, the top manufactured product traded between them.

“This is the understanding that Canada had all the way along,” Canadian Trade Minister Mary Ng told reporters in Mexico City. “It’s what we negotiated.”

The release of the ruling comes a day after the heads of the three nations gathered for the North American Leaders’ Summit, or more informally the “Three Amigos,” which resulted in agreement to cooperate on semiconductor development and climate change.

The countries still have points of friction, particularly energy. The US and Canada have complained about aspects of Mexico’s electricity policy, which they say raises prices for factories that are key to the region’s competitiveness. The US also has complained about Mexico’s plans to ban imports of American genetically modified corn, potentially shutting off the biggest market for America’s farmers.

In the autos dispute, the US had insisted on a strict method to tally the origin of core parts, including engines, in the overall calculation of a car’s content. That US interpretation would have made it harder for plants in Mexico and Canada to meet the new duty-free threshold of 75% regional content, up from 62.5% under Nafta.

For example, if a core part uses 75% regional content, Mexico and Canada argued that the USMCA allows them to round up to 100% for the purposes of meeting the second, broader requirement for a car’s regional content. The US, however, didn’t want to permit rounding up, which would have made it tougher to reach the duty-free threshold.