USMCA: Motor Vehicle Provisions and Issues

USMCA: Motor Vehicle Provisions and Issues

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Updated October 14, 2021
USMCA: Motor Vehicle Provisions and Issues
Background
North America and that 70% of steel be domestically
The United States-Mexico-Canada Agreement (USMCA),
melted and poured.
ratified by Congress on January 16, 2020, and signed into
 New wage requirements stipulating that 40%-45% of
law on January 29, 2020 (P.L. 116-113), replaced the North
North American auto content be made by workers
American Free Trade Agreement (NAFTA) on July 1,
earning at least $16 per hour, averaged by class, model
2020. NAFTA reduced and eliminated trade and investment
or plant, with credits for research and development and
barriers between the United States and two of its largest
production in high-wage regions. (NAFTA did not have
trading partners, Canada and Mexico. It was the most
a wage provision.)
comprehensive free trade agreement (FTA) negotiated at
the time and contained groundbreaking provisions in areas
Figure 1. Comparison of U.S. Imports from Canada
such as market access, rules of origin (ROO), intellectual
and Mexico: NAFTA/USMCA and Other, 2020
property rights, services, investment, dispute settlement,
($ in billions, percentage imported under NAFTA/USMCA)
and worker rights. NAFTA was instrumental in reshaping
the North American motor vehicle industry, which has
become highly integrated and a major source of trade and
investment among the three trading partners.
NAFTA and Mexico’s Motor Vehicle Industry
Mexico’s protectionist auto decrees of 1962, 1972, 1977, 1984,
and 1989 reserved the Mexican market for domestical y-
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. NAFTA “locked in” Mexico’s

unilateral liberalization efforts of the late 1980s of its restrictive
Source: Compiled by CRS with USITC data.
barriers and expanded the Mexican market for U.S. products.
Trade Agreements and Rules of Origin
ROO are used to determine the country of origin of
NAFTA and Motor Vehicles
imported products. Preferential ROO are applied in FTAs to
NAFTA phased out tariffs on motor vehicles and parts over
ensure that a good receives preferential tariff benefits only
a 10-year period. NAFTA, the U.S.-Canada FTA of 1988,
if it is made wholly or in large part within the region. If the
and the elimination of Mexican trade barriers were
good is not wholly obtained in the region, a tariff-shift
instrumental in the initial integration of the North American
method and/or regional value content (RVC) method is
motor vehicle industry. Production of vehicles and parts
applied to determine origin. Goods may qualify if the
expanded significantly as major U.S., Asian, and European
materials are sufficiently transformed within the region to
automakers developed supply chains in the region. Major
go through a Harmonized Tariff Schedule (HTS) change in
growth occurred largely in Mexico, which now accounts for
tariff classification (also known as a “tariff shift”). In many
23% of total continental vehicle production and a
cases, goods must meet a minimum level of RVC, in
significant portion of duty-free trade in auto parts. Motor
addition to undergoing a tariff shift. RVC may be calculated
vehicles and parts account for the highest share of U.S.
using the “transaction-value” or the “net-cost” method.
imports from Canada and Mexico that claim
USMCA has a separate set of ROO for motor vehicles and
NAFTA/USMCA duty-free benefits. As shown in Figure 1,
parts in which RVC must use the net-cost method. If
97% of U.S. imports in motor vehicles from Canada and
preferential ROO requirements are not met, the good will
Mexico and 70% of U.S. imports in motor vehicle parts
be imported under most-favored nation (MFN) tariff rates.
entered duty-free under NAFTA/USMCA in 2020.
For example, U.S. MFN rates are 2.5% for passenger
vehicles and 25% for trucks. Importers may choose to
USMCA Key Changes
import under MFN rates if the cost of complying with ROO
The USMCA maintains NAFTA’s tariff and nontariff
requirements are higher, which could potentially increase
market-opening provisions. Key changes include:
inputs from Asia or other countries outside the region.
 New motor vehicle ROO and procedures with an
U.S. Motor Vehicle Industry
increase in the North American content requirement
from NAFTA’s 60%
Globally, motor vehicle manufacturing has largely been
-62.5% to USMCA’s 70%-75%.

reorganized around regional rather than purely domestic
Requirements that 70% of the aluminum used in
supply chains. North America is the world’s third-largest
vehicles subject to tariff-free access be produced in
motor vehicle manufacturer, after China and the European
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USMCA: Motor Vehicle Provisions and Issues
Union, producing 16.8 million passenger and commercial
Possible USMCA Effects
vehicles in 2019; of these 10.9 million were assembled in
The Trump Administration asserted that USMCA would
the United States, 3.9 million in Mexico, and 1.9 million in
increase assembly and parts jobs, capital investments in
Canada. Across the region, hundreds of suppliers provide
U.S. automotive plants, and domestic parts production,
thousands of parts for vehicles, some of which cross the
including those used in autonomous and electric vehicles.
border seven or eight times as they are assembled into
Other studies have forecast different outcomes.
larger products, according to industry representatives. For
example, some vehicle seats utilize components from four
U.S. International Trade Commission (USITC) modeling
different U.S. states and four Mexican locations, with final
suggested that USMCA ROO are unlikely to result in major
assembly in the U.S. Midwest. Parts manufacturers operate
changes in the North American auto supply chain. It
in all three countries to be close to vehicle assembly plants.
forecast a slight decrease in the sale of smaller passenger
cars and increases in U.S. employment in the production of
Figure 2.U.S. Motor Vehicle and Parts Trade Balance
engines and transmissions; demand for North American
(2019, $ in billions)
made steel and aluminum; imported parts from outside
North America; and production costs in the United States
and Mexico, resulting in higher prices for automobiles. The
nonprofit Center for Automotive Research (CAR) forecast
that USMCA would likely increase production of core
parts, noting that most North American-made vehicles
already meet most of the new rules . CAR predicted a
“slight increase” in U.S. vehicle prices. An International
Monetary Fund (IMF) report contended that the new ROO
would “not achieve their desired outcomes” and would lead
to a decline in North American vehicle and parts
production, shifting production outside the region and
resulting in higher vehicle prices.
Since USMCA was negotiated, the pace of passenger
vehicle electrification has increased, with implications for
the North American supply chain. Production of many parts
used in a conventional vehicle powertrain may decline and
be replaced with fewer parts used in electric vehicles. The
large, heavy batteries that power those vehicles are likely to

be produced close to the final assembly plants. These
Source: CRS based on data from U.S. Department of Commerce.
technological and manufacturing changes are likely to
result in the shrinkage of the current vehicle parts trade,
The United States exports more than 2 million motor
increasing the value added of the assembly plants.
vehicles a year to markets around the world—with Canada
and Mexico being the two largest markets . In 2019, as
Issues for Congress
shown in Figure , the U.S. motor vehicle trade deficit with
USMCA implementation is an ongoing area of interest for
Canada was -$11.7 billion (down from -$20 billion in
Congress. A major issue is whether non-originating
2017), and with Mexico, -$67.5 billion (up from -$45
material in core auto parts (e.g., engines and advanced
billion in 2017). In motor vehicle parts, the United States
batteries) deemed originating (100% North American
had a trade deficit of $29 billion with Mexico in 2019. Only
content) should be included in the calculation of the RVC in
in motor vehicle parts trade with Canada did the United
larger parts or motor vehicles. In August 2021, the Mexican
States record a surplus ($5.9 billion) in 2019. Although not
and Canadian governments, which argue that total value of
accounted for in trade statistics, vehicle parts exported from
core parts deemed originating should be counted, formally
the United States to Mexico and Canada often come back to
requested consultations with the United States, which
the United States incorporated into finished motor vehicles.
asserts that non-originating parts should not be included in
the larger RVC calculation. The larger implications of the
Auto parts and final assembly account for a large share of
stricter RVC requirements and the wage requirement on
U.S. manufacturing employment: more than 900,000 jobs in
U.S. domestic production and motor vehicle supply chains
2021, with 712,000 in parts manufacturing and 188,000 in
is unclear. On labor issues, USTR has twice asked Mexico
vehicle assembly. Average production wages at General
to review whether workers at an auto parts plant were
Motors range from $16 per hour for temporary workers to
denied labor rights addressed in USMCA. USTR and the
$32 for permanent employees who assemble vehicles, for a
Labor Department later announced successful remediation
weighted average of about $21 per hour. At Toyota, the
under USMCA’s dispute resolution procedures.
hourly production worker wage is reportedly about $20.
Hourly production wages in Canada are similar to those at
M. Angeles Villarreal, Specialist in International Trade
the Detroit 3 (GM, Ford, and Stellantis’ Chrysler unit). In
and Finance
Mexico, average hourly wages for workers in auto
assembly are much lower. It is challenging to compare
Bill Canis, Specialist in Industrial Organization and
Mexican wages with U.S. wages because of differences in
Business
how Mexican plants compensate their employees.
Liana Wong, Analyst in International Trade and Finance
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USMCA: Motor Vehicle Provisions and Issues

IF11387

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