Motor vehicles are the main manufactured product traded between the three North American countries. Canada argues that the United States’ approach to the trade pact would make it more difficult to exempt Canadian vehicles and essential auto parts – engines, transmissions and flywheels – from tariffs.
The dispute involves a technical issue of the trade agreement. The provision would require that by 2025, 75% of a vehicle’s parts and certain critical components be manufactured on US soil in order to qualify for duty exemption. Otherwise, the United States may impose tariffs under World Trade Organization (WTO) rules.
The United States also wants to offer a tax credit of $12,500 to consumers who buy an electric vehicle. On the other hand, part of this credit would only be valid if the car was assembled in the United States, and within five years, the entire credit will apply only to vehicles leaving American factories.
On October 23, the Minister of International Trade and Export Promotion, Mary Ng, sent a letter to senior American officials to inform them of Canada’s disagreement with this measure.
Ottawa threatened Washington in December with retaliatory action if the vehicle tax credit went ahead. Justin Trudeau traveled to Washington in November to meet Joe Biden and discuss this thorny issue with him. However, he returned empty-handed to Ottawa.
Yet the signing of theCUSMA provides that there should be no tariff barriers or protectionist measures in the automotive sector.
However, the tax credit granted only for cars manufactured entirely in the United States constitutes a protectionist measure in the eyes of Canada and Mexico. This is why Canada joins Mexico in its request for the creation of a dispute settlement committee before theCUSMA.
Protectionist measures and disputes
During the renegotiation of the North American Free Trade Agreement (NAFTA) in 2019, Canada, the United States and Mexico agreed to a dispute settlement mechanism that will now be used.
In her statement released Thursday, Minister Mary Ng argues that the US view of the rules is
incompatible with the trade agreement concluded by the three countries, which entered into force in 2020.
The provision on
rules of origin was meant to encourage
production and supply cars and light trucks in North America,” Ms. Ng wrote in her statement.
Before the entry into force of theCUSMA in July 2020, only 62.5% of a vehicle’s parts had to be manufactured domestically to qualify for tariff exemption.
Mexico and Canada argue that if a central part of a car uses 75% regional manufacturing, it satisfies the agreement to meet a second requirement, so that the whole car meets the criteria to be considered free of tariffs.
The United States disagrees with this position, which could make it more difficult to qualify entire vehicles, including electric vehicles.
A dispute resolution committee could hear the arguments of the three countries. The Canadian government
will always stand up for the auto industry and the workers, said Ms. Ng.
With information from Laurence Martin and Ashley Burke of CBC