Canada is joining Mexico's official complaint today requesting a dispute settlement panel to resolve a claim that the U.S. is violating the new NAFTA by insisting on a stricter interpretation of a key provision on auto parts.
Motor vehicles are the most valuable product traded between the three countries. Canada argues that the way the U.S. views the Canada-U.S.-Mexico Agreement on trade (CUSMA) would make it harder for Canadian vehicles and essential auto parts — engines, transmissions and steering wheels — to qualify as duty-free.
Canada argues the U.S.'s view of the rules is "inconsistent" with the trade deal the three countries agreed to.
"Canada, Mexico and the United States would all benefit from certainty that CUSMA is being implemented as negotiated, and Canada is optimistic that a dispute settlement panel will help ensure a timely resolution of this issue," wrote International Trade and Export Promotion Minister Mary Ng in a statement issued Thursday.
Canada and Mexico have been working to resolve this dispute for more than a year.
The dispute centres on how the three countries define a North American vehicle. A provision in CUSMA states that by 2025, 75 per cent of each vehicle and of certain core components must be manufactured in the country of origin in order to cross a North American border duty-free. If those products fail to meet that threshold, the U.S. can charge tariffs under World Trade Organization rules.
The U.S. interpretation of the provision is more stringent than Canada's and could make it harder for entire vehicles to qualify for duty-free treatment.
Mexico and Canada argue that if 75 per cent of an essential car component is manufactured regionally, that's enough to define it as a duty-free North American part in a fully-assembled vehicle. The U.S. doesn't agree — which could make it harder for entire vehicles containing those parts to meet the 75 per cent threshold for duty-free trade.
Canada says U.S. interpretation would be a burden
A Canadian senior government official told CBC News the U.S. interpretation could be overly burdensome for the industry and regulators.
Flavio Volpe, president of the Automotive Parts Manufacturers' Association, said that if the U.S goes ahead with its interpretation, it could have major implications across North America.
Volpe said auto makers might opt not to try to comply with the new rules — to instead source auto parts outside of North America and accept the 2.5 per cent WTO tariff.
"The biggest winners are the low-cost Asian or Eastern European countries who make those same parts with very cheap labour," said Volpe. "They'll just become part of the Canadian cars we all see on the road today."
He said that undermines the entire goal of the provision in CUSMA — to boost production in North America.
Volpe said that while Canada, Mexico and the U.S. would suffer, the U.S. has the most at stake since it makes about 50 per cent of all car parts in North America.
"The Trump administration, though it was tough and sometimes brainless in the negotiation of this agreement, ultimately came to a tripartisan place with rules we all agree to," said Volpe.
Volpe said he was relieved when President Joe Biden took office but now believes there are "a lot of very protectionist leaders in that administration as well."
"Some of us are really surprised to see the Americans go back on the commitments made during this negotiation," he added.
Dispute mechanism panel asked to settle dispute
While re-negotiating NAFTA in 2019, Canada, Mexico and the U.S. agreed on a dispute mechanism process; that process will now be used to settle this dispute.
The dispute resolution panel requested today by Mexico and Canada should have time to review submissions from all three countries and issue its report before the new rules take effect in 2025.
Ng wrote the Canadian government will "always stand up for our auto industry and workers as we build toward a sustainable economic recovery."
This matter is not related to Canada's dispute with the U.S. over its electric vehicle tax incentive for American-made vehicles.