December 13, 2019
USMCA: Motor Vehicle Provisions and Issues
Background
 Increase in North American content requirement from
The proposed United States-Mexico-Canada Agreement
NAFTA’s 60%-62.5% to 75%.
(USMCA), if approved by Congress, would revise and
 70% of a vehicle’s steel and aluminum must originate in
replace the North American Free Trade Agreement
North America, and the steel must be domestically
(NAFTA), which has been in force since January 1, 1994.
melted and poured. (NAFTA does not have similar
NAFTA eliminated trade and investment barriers between
provisions.)
the United States and two of its largest trading partners,

Canada and Mexico. It was the most comprehensive free
Wage requirements stipulating that 40%-45% of North
trade agreement (FTA) negotiated at the time and contained
American auto content be made by workers earning at
groundbreaking provisions in areas such as market access,
least $16 per hour, averaged by class, model or plant,
rules of origin (ROO), intellectual property rights, services,
with credits for R&D and production in high-wage
investment, dispute settlement, and worker rights. The
regions. (NAFTA does not have a wage provision.)
North American motor vehicle industry is highly integrated,
 Additional side letters that would exempt from potential
partially as a result of NAFTA and is a major source of
Section 232 tariffs: 2.6 million passenger vehicles each
trade and investment among the NAFTA partners. The
from Canada and Mexico annually; light trucks from
changes in the proposed USMCA provisions have
Canada or Mexico; auto parts imports amounting to
implications for the motor vehicle industry in all three
$32.4 billion from Canada and $108 billion from
countries, as well as for future U.S. trade policy.
Mexico in declared customs value in any calendar year.
NAFTA and Mexico’s Motor Vehicle Industry
Figure 1. U.S. Imports from Canada and Mexico:
NAFTA and Other Programs, 2017
NAFTA helped “lock in” Mexican liberalization efforts of the late
1980s and expanded the Mexican market for U.S. motor vehicles
($ in bil ions, % of imports covered by NAFTA)
and investment. Mexico’s restrictive auto decrees of 1962, 1972,
1977, 1984, and 1989 reserved the Mexican market for
domestically produced parts and vehicles through restrictive
requirements on domestic content, trade balance, production
quotas, price controls, and export levels, in addition to
restrictions on foreign investment and high tariffs. Mexico began
liberalizing restrictive trade and investment rules in 1989. In
1991, there were only 83 cars per 1,000 people in Mexico,
compared to 289 in 2015.

NAFTA and Motor Vehicles
Source: Compiled by CRS with USITC data.
NAFTA phased out tariffs on motor vehicles and parts, and
Trade Agreements and Rules of Origin
other trade barriers, such as Mexico’s auto decree, over a
ROO are used to determine the country of origin of
10-year period. NAFTA, the U.S.-Canada FTA of 1988,
imported products. Preferential ROO are applied in FTAs to
and the elimination of Mexican trade barriers were
ensure only eligible products receive preferential tariff
instrumental in the integration of the North American motor
benefits if the good is made wholly or in large part within
vehicle industry. The integration of the North American
the region. If the good is not wholly obtained in the region,
motor vehicle industry expanded under NAFTA with major
a tariff-shift method and/or regional value content (RVC)
Asian and European automakers constructing their own
method is applied to determine origin. Goods may qualify if
supply chains within the region. The major growth occurred
the materials are sufficiently transformed within the region
largely in Mexico, which now accounts for about 20% of
to go through a Harmonized Tariff Schedule (HTS) change
total continental vehicle production. The highest share of
in tariff classification (also known as a “tariff shift”). In
U.S. trade with Mexico is in the motor vehicle industry; it is
many cases, goods must meet a minimum level of RVC, in
also the industry that makes the most use of NAFTA duty-
addition to undergoing a tariff shift. RVC may be calculated
free treatment (see Figure 1).
using the “transaction-value” or the “net-cost” method. A
USMCA Key Changes
good would meet RVC requirements if regional transaction-
The proposed USMCA would maintain NAFTA’s tariff and
value is at least 60% or regional net cost is at least 50%.
However, like NAFTA, USMCA has a separate set of ROO
non-tariff market-opening provisions. Key changes from
for motor vehicles and parts in which RVC must use the
NAFTA would include:

net-cost method. If preferential ROO requirements are not
New motor vehicle ROO and procedures.
met, the good will be imported under most-favored nation
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USMCA: Motor Vehicle Provisions and Issues
(MFN) tariff rates. For example, U.S. MFN rates are 2.5%
similar to those at the Detroit 3 (GM, Ford, and Fiat
for passenger vehicles and 25% for trucks.
Chrysler). In Mexico, average hourly wages for workers in
auto assembly were $7.34 in 2017.
U.S. Motor Vehicle Industry
Globally, motor vehicle manufacturing has largely been
Possible USMCA Effects
reorganized around regional rather than purely domestic
The U.S. Trade Representative asserts that USMCA will
supply chains. North America is the world’s third largest
increase: assembly and parts jobs, capital investments in
motor vehicle manufacturer, after China and the European
U.S. automotive plants, and domestic parts production,
Union, producing 17.4 million passenger and commercial
including those used in autonomous and electric vehicles.
vehicles in 2018; of these: 11.3 million were assembled in
Several studies have estimated the possible impact of
the United States, 4.1 million in Mexico and 2 million in
USMCA automotive provisions, with some substantive
Canada. Since NAFTA, the three countries developed an
differences in their conclusions.
integrated supply chain with hundreds of suppliers
providing thousands of parts for vehicles, some of which
The U.S. International Trade Commission (USITC)
cross the border multiple times as they are assembled into
modeling suggests that USMCA ROO are unlikely to result
larger products. For example, some vehicle seats utilize
in major changes in the North American auto supply chain.
components from four different U.S. states and four
It forecasts increases in:
Mexican locations, with final assembly in the U.S.
 U.S. employment in the production of core parts such as
Midwest. Parts manufacturers operate in all three countries
engines and transmissions;
to be close to vehicle assembly plants.
 demand for North American made steel and aluminum;

Figure 2. U.S. Motor Vehicle and Parts Trade Balance
imported parts from outside North America; and
 production costs in the United States and Mexico,
(2018, $ in bil ions)
resulting in higher prices for automobiles.
As a result of more expensive vehicles, the USITC model
predicts that some 140,000 fewer vehicles would be sold,
mostly smaller passenger cars.
CAR forecasts that USMCA would provide “a degree of
stability” to automotive production in North America, with
a likely increase in production of core parts. It notes that
most U.S.- and Canadian-made vehicles already meet most
of the new rules. At 68%, most of Mexico’s production
follows the rules. CAR foresees a “slight increase” in U.S.
consumer prices of North American vehicles.

Source: CRS based on data from U.S. Department of Commerce.
An International Monetary Fund (IMF) report contends that
the new automotive ROO would “not achieve their desired
outcomes”: the rules w
The United States exports more than two million motor
ould lead to a decline in North
vehicles a year to markets around the world—with Canada
American vehicle and parts production, shifting production
and Mexico being the two largest markets. In 2018, as
outside the region, and, in turn, higher vehicle prices.
shown in Figure 2, the U.S., motor vehicle trade balance
Outlook for Congress
with Canada was -$12.5 billion (down from -$20 billion in
2017), and with Mexico, -$60.9 billion (up from -$45
The proposed USMCA provisions affecting the motor
billion in 2017). In motor vehicle parts, the United States
vehicle industry, such as the increased North American
had a trade deficit of $30 billion with Mexico in 2018. Only
content requirements and its implications for U.S. trade
in motor vehicle parts trade with Canada did the United
policy, are a central issue of congressional debate over
States record a surplus ($6.4 billion) in 2018. Although not
ratification of the agreement. Some policymakers contend
accounted for in trade statistics, vehicle parts exported from
that tightening the ROO scales back provisions in NAFTA
the United States to Mexico and Canada often come back to
and actually restricts trade, which could complicate future
the United States in finished motor vehicles.
U.S. trade negotiating efforts to open other markets. Other
policymakers welcome provisions such as the wage
requirement, stating that it would benefit U.S. workers. See
Auto parts and final assembly account for a large share of
also CRS Report R44981, NAFTA Renegotiation and the
U.S. manufacturing employment: more than 830,000 jobs in
Proposed United States-Mexico-Canada Agreement
2018, with 597,000 in parts manufacturing and 234,000 in
(USMCA), by M. Angeles Villarreal and Ian F. Fergusson.
vehicle assembly. According to the Center for Automotive
Research (CAR), average production wages at General
Motors (GM) range from $16.67 per hour for temporary
M. Angeles Villarreal, Specialist in International Trade
workers to $32.32 for permanent employees who assemble
and Finance
vehicles, for a weighted average of about $26 per hour. At
Bill Canis, Specialist in Industrial Organization and
Toyota the hourly production worker wage is reportedly
Business
about $21.29. Hourly production wages in Canada are
Liana Wong, Analyst in International Trade and Finance
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USMCA: Motor Vehicle Provisions and Issues

IF11387


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