USMCA Brings New Challenges to Mexico’s Automotive Industry

Mexico has significant experience with international agreements, as it has numerous free trade agreements (FTA) with countries in Oceania, Asia, the EU and the Americas. However, most of Mexico’s exports head to the USMCA region and the treaty, while allowing trade to grow, has also caused issues that must be addressed.

The automotive industry also counts with 28 years of experience exporting across the world, while adhering to the different rules of origin that each agreement demands, said Fausto López, Director of International Treaties and Customs, Volkswagen Mexico. 

Mexico’s privileged geographical position opens the door to trade with two of the most important economies around the world: the US and Canada. These three countries have had a long history in doing business. The North American Free Trade Agreement (NAFTA) provided a trilateral bloc in North America and created a free-trade zone where tariffs were reduced. During former US President Donald Trump’s administration, the US renegotiated NAFTA and changed the tariffs of steel and finished vehicles that would be applied to Mexico. Since its entry into force on July 1, 2022, the new treaty has caused a constant back and forth between the three countries. 

During the negotiations of what would be the USMCA, the US Trade Representative (USTR) presented some issues that were found to be “controversial,” said López who called them “poison pills.” The issues were: a “Sunset Clause,” which demands a review of the USMCA every five years; “seasonal tariffs” for agricultural goods; the Dispute Settlement Transportation of goods within the region; modifications to the textile sector rules; and the rule of origin for the automotive industry.

Before the USMCA, Mexico was seeking to reduce regional content in the automotive sector. But this changed with the USMCA, which demands an increase in regional content. NAFTA required a 62.5 percent or more of regional value content based on the net cost of the vehicle. However, the required regional value content increased to 75 percent based on the vehicle’s core and key parts. Automakers must also comply with metal and aluminum requirements. 

Changes in the regional value content per vehicle triggered a panel for a state-to-state dispute. “The US is currently subject to a dispute panel on the core and key parts issue according to the auto trade agreement with Mexico and Canada,” said López. 

On January 6, 2022, Mexico called for a meeting of this panel, Canada joined later. The panel is convening and a resolution is expected for November 2022. If Mexico and Canada win, the US will be forced to start the new rule of origin calculations in 45 days. 

Mexico’s trade partners have also called for consultations to address the country’s energy policies, claiming these policies favor local state-owned companies in violation of the USMCA. If the consultations do not reach a solution within 75 days, they will enter a solution panel that Mexico is most likely to lose, said López. 

The USMCA also includes a rapid response mechanism, which six companies have already used to denounce alleged violations of labor laws. These businesses have 45 days to reach a remediation with the local government and later with the labor committee of the USMCA. If one of these steps fails, a panel of discussion is brought up and if no agreement is reached, sanctions for both the country and the company are applied.