Auto Rules of Origin Will Need to Change, USMCA Panelists Say

Panelists from the three countries in the USMCA -- including the chief negotiator for Mexico in what became the USMCA -- said they expect, or hope for, the auto rules of origin to change four years from now, as part of the six-year review of the trade deal.

Eric Miller, president of Rideau Potomac Strategy Institute and a former Canadian official working on trade facilitation with the U.S., said, "Ultimately, what we worry about is, we’re going to get to a point where nobody is going to be able to meet the rules of origin." Miller was referring to rules of origin for the Inflation Reduction Act, rather than the USMCA standard, and in that law, 100% of electric vehicle batteries' components will need to be North American-made in 2029 in order for consumers to receive half the $7,500 credit.

"Perhaps in the six -year review, we’re going to be in a situation where that will be renegotiated," Miller said during a panel discussion at the Clayton Yeutter Institute of International Trade and Finance in Nebraska.

David Gantz, the Will Clayton Fellow in Trade and International Economics at the Baker Institute at Rice University, was more definitive. Even though he said it's unknown who will be leading Mexico and the U.S. four years from now, he said he thinks the auto rules of origin will change as a result of the review.

"The one thing they’re going to have to do is figure out better ways of dealing with electric vehicle batteries rules of origin," he said. Under USMCA, 75% of the advanced battery's value will have to be North American in order for a vehicle to qualify, but in the earlier years, that is not enforced, and as long as the battery qualifies as North American under a tariff shift rule, that will be enough.

Kenneth Smith Ramos, a partner at AGON, a Mexican consultancy, who was chief negotiator for USMCA, said he's looking to an earlier development -- the dispute settlement panel decision about how the U.S. is interpreting auto rules of origin -- specifically, whether qualifying parts are counted 100% when you are adding up the total value of the vehicle.

Smith Ramos said the U.S. tried to make it harder for Mexican cars and trucks to enter duty-free because of President Donald Trump's obsession with the trade deficit with Mexico. He said the rules as arrived at strike a balance, that even though they are more complex than they were under NAFTA, he doesn't believe they're so strict that automakers would rather export from Eastern Europe or China than produce in North America.

"However, right now, we are involved in a trade dispute with the United States," he said. "The U.S. is sort of interpreting incorrectly what you need to do to comply with the value content requirements."

A member of the audience asked what would happen if the U.S. loses the case, but then doesn't comply. (The U.S. believes that's what Canada has done after it lost its dairy dispute).

Gantz said he suspects the U.S. will lose, and said, "I think the odds would be pretty good that they will [comply] and I think the auto industry in North America is so important, it would be quite foolhardy for the U.S. to allow the wedge to go any further."

Smith Ramos told the audience that no one should be worried that there are trade disputes already under USMCA, even in important sectors like autos and energy. He said panels form quickly and come to resolution quickly, and that allows disagreements to be managed without them affecting the rest of the agreement.

Smith Ramos said parties that lose cases and don't comply can be hit with tariffs. He said that if Mexico lost a case on energy, and didn't change its policy, its exports could be subject to more than $10 billion in penalties.

"If you go to a panel and you lose, you have to comply, because that gives credibility to the system," he said.

Even though Smith Ramos is Mexican, he expressed hope that the U.S. would launch formal consultations on the planned ban on GMO corn imports in Mexico.

He said taking such a step, when Mexico imports more than 17 million tons a year to feed its livestock and for agro-industrial processes, would be "suicidal." He said right now voices in the environmental and health ministries are winning out over voices in the trade ministry and agriculture ministry, but, he said, the threat of a dispute can get things going.