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Updated December 19, 2019
USMCA: Motor Vehicle Provisions and Issues
Background
New motor vehicle ROO and procedures.
The proposed United States-Mexico-Canada Agreement
Increase in North American content requirement from
(USMCA) would revise and replace the North American
NAFTA’s 60%-62.5% to 70%-75%.
Free Trade Agreement (NAFTA), in force since January 1,
1994. NAFTA eliminated trade and investment barriers
70% of a vehicle’s steel and aluminum must originate in
between the United States and two of its largest trading
North America, and the steel must be domestically
partners, Canada and Mexico. It was the most
melted and poured. (NAFTA does not have similar
comprehensive free trade agreement (FTA) negotiated at
provisions.)
the time and contained groundbreaking provisions in areas
Wage requirements stipulating that 40%-45% of North
such as market access, rules of origin (ROO), intellectual
American auto content be made by workers earning at
property rights, services, investment, dispute settlement,
least $16 per hour, averaged by class, model or plant,
and worker rights. The North American motor vehicle
with credits for R&D and production in high-wage
industry is highly integrated and is a major source of trade
regions. (NAFTA does not have a wage provision.)
and investment among the NAFTA partners. On December
Additional side letters that would exempt from potential
13, the Trump administration submitted to Congress the
Section 232 tariffs: 2.6 million passenger vehicles each
proposed USMCA implementing legislation, which reflects
from Canada and Mexico annually; light trucks from
the recent amendments. On the same day, the United States-
Canada or Mexico; auto parts imports amounting to
Mexico-Canada Implementation Act (H.R. 5430) was
$32.4 billion from Canada and $108 billion from
introduced in the House of Representatives. On December
Mexico in declared customs value in any calendar year.
16, the bill was introduced in the Senate (S. 3052).
Figure 1. U.S. Imports from Canada and Mexico:
NAFTA and Mexico’s Motor Vehicle Industry
NAFTA and Other Programs, 2018
NAFTA helped “lock in” Mexican liberalization efforts of the late
($ in bil ions, percentage of imports covered by NAFTA)
1980s and expanded the Mexican market for U.S. motor vehicles
and investment. Mexico’s restrictive auto decrees of 1962, 1972,
% NAFTA
% Other
1977, 1984, and 1989 reserved the Mexican market for
MOTOR VEHICLES
domestically produced parts and vehicles through restrictive
OIL & GAS
requirements on domestic content, trade balance, production
MOTOR VEHICLE PARTS
COMPUTER EQUIPMENT
quotas, price controls, and export levels, in addition to
NONFERROUS (EXC ALUM) & PROCESSING
restrictions on foreign investment and high tariffs. Mexico began
PETROLEUM & COAL PRODUCTS
liberalizing restrictive trade and investment rules in 1989. In
ELECTRICAL EQUIPMENT
1991, there were only 83 cars per 1,000 people in Mexico,
COMMUNICATIONS EQUIPMENT
OTHER GENERAL PURPOSE MACHINERY
compared to 289 in 2015.
NAVIGATIONAL/MEASURING/MEDICAL/
CONTROL INSTRUMENT
$0
$20
$40
$60
$80 $100 $120
NAFTA and Motor Vehicles
Source: Compiled by CRS with USITC data.
NAFTA phased out tariffs on motor vehicles and parts, and
other trade barriers, such as Mexico’s auto decree, over a
Trade Agreements and Rules of Origin
10-year period. NAFTA, the U.S.-Canada FTA of 1988,
ROO are used to determine the country of origin of
and the elimination of Mexican trade barriers were
imported products. Preferential ROO are applied in FTAs to
instrumental in the integration of the North American motor
ensure only eligible products receive preferential tariff
vehicle industry. The integration of the North American
benefits if the good is made wholly or in large part within
motor vehicle industry expanded under NAFTA with major
the region. If the good is not wholly obtained in the region,
Asian and European automakers constructing their own
a tariff-shift method and/or regional value content (RVC)
supply chains within the region. The major growth occurred
method is applied to determine origin. Goods may qualify if
largely in Mexico, which now accounts for about 20% of
the materials are sufficiently transformed within the region
total continental vehicle production. The highest share of
to go through a Harmonized Tariff Schedule (HTS) change
U.S. trade with Mexico is in the motor vehicle industry; it is
in tariff classification (also known as a “tariff shift”). In
also the industry that makes the most use of NAFTA duty-
many cases, goods must meet a minimum level of RVC, in
free treatment (see Figure 1).
addition to undergoing a tariff shift. RVC may be calculated
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%.
non-tariff market-opening provisions. Key changes from
However, like NAFTA, USMCA has a separate set of ROO
NAFTA would include
for motor vehicles and parts in which RVC must use the
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USMCA: Motor Vehicle Provisions and Issues
net-cost method. If preferential ROO requirements are not
about $21.29. Hourly production wages in Canada are
met, the good will be imported under most-favored nation
similar to those at the Detroit 3 (GM, Ford, and Fiat
(MFN) tariff rates. For example, U.S. MFN rates are 2.5%
Chrysler). In Mexico, average hourly wages for workers in
for passenger vehicles and 25% for trucks.
auto assembly were $7.34 in 2017.
U.S. Motor Vehicle Industry
Possible USMCA Effects
Globally, motor vehicle manufacturing has largely been
The U.S. Trade Representative asserts that USMCA will
reorganized around regional rather than purely domestic
increase: assembly and parts jobs, capital investments in
supply chains. North America is the world’s third largest
U.S. automotive plants, and domestic parts production,
motor vehicle manufacturer, after China and the European
including those used in autonomous and electric vehicles.
Union, producing 17.4 million passenger and commercial
Several studies have estimated the possible impact of
vehicles in 2018; of these: 11.3 million were assembled in
USMCA automotive provisions, with some substantive
the United States, 4.1 million in Mexico and 2 million in
differences in their conclusions.
Canada. Since NAFTA, the three countries developed an
integrated supply chain with hundreds of suppliers
The U.S. International Trade Commission (USITC)
providing thousands of parts for vehicles, some of which
modeling suggests that USMCA ROO are unlikely to result
cross the border multiple times as they are assembled into
in major changes in the North American auto supply chain.
larger products. For example, some vehicle seats utilize
It forecasts increases in
components from four different U.S. states and four
U.S. employment in the production of core parts such as
Mexican locations, with final assembly in the U.S.
engines and transmissions;
Midwest. Parts manufacturers operate in all three countries
demand for North American made steel and aluminum;
to be close to vehicle assembly plants.
imported parts from outside North America; and
Figure 2.U.S. Motor Vehicle and Parts Trade Balance
production costs in the United States and Mexico,
resulting in higher prices for automobiles.
(2018, $ in bil ions)
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.
An International Monetary Fund (IMF) report contends that
Source: CRS based on data from U.S. Department of Commerce.
the new automotive ROO would “not achieve their desired
outcomes”: the rules would lead to a decline in North
The United States exports more than 2 million motor
American vehicle and parts production, shifting production
vehicles a year to markets around the world—with Canada
outside the region, and, in turn, higher vehicle prices.
and Mexico being the two largest markets. In 2018, as
Outlook for Congress
shown in Figure 2, the U.S. motor vehicle trade balance
with Canada was -$12.5 billion (down from -$20 billion in
The proposed USMCA provisions affecting the motor
2017), and with Mexico, -$60.9 billion (up from -$45
vehicle industry, such as the increased North American
billion in 2017). In motor vehicle parts, the United States
content requirements and its implications for U.S. trade
had a trade deficit of $30 billion with Mexico in 2018. Only
policy, are a central issue of congressional debate over
in motor vehicle parts trade with Canada did the United
ratification of the agreement. Some policymakers contend
States record a surplus ($6.4 billion) in 2018. Although not
that tightening the ROO scales back provisions in NAFTA
accounted for in trade statistics, vehicle parts exported from
and actually restricts trade, which could complicate future
the United States to Mexico and Canada often come back to
U.S. trade negotiating efforts to open other markets. Other
the United States in finished motor vehicles.
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
M. Angeles Villarreal, Specialist in International Trade
Motors (GM) range from $16.67 per hour for temporary
and Finance
workers to $32.32 for permanent employees who assemble
Bill Canis, Specialist in Industrial Organization and
vehicles, for a weighted average of about $26 per hour. At
Business
Toyota the hourly production worker wage is reportedly
https://crsreports.congress.gov
USMCA: Motor Vehicle Provisions and Issues
IF11387
Liana Wong, Analyst in International Trade and Finance
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