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Canada is joining Mexico in looking to settle a dispute over how automotive sector content requirements are to be applied under the terms of the U.S.-Mexico-Canada (USMCA) trade pact.

The USMCA came into effect in 2020, replacing the long-standing North American Free Trade Agreement (NAFTA).

Mexico and Canada are particularly opposed to proposed U.S. tax breaks for American-based manufacturers of electric vehicles, which they believe subvert the North American auto industry, which became highly integrated under NAFTA.

Under USMCA, 75% of a vehicle’s components must originate in North America to quality for tax-free status, up from 62.5% under NAFTA.

Canada argues this interpretation would make it harder for Canadian vehicles and essential auto parts to qualify as duty-free. Canada and Mexico counter that if 75 per cent of an essential car component is manufactured regionally, that should suffice to deem it as a duty-free North American part in a fully-assembled vehicle. The U.S., however, doesn’t want to allow foreign-made materials, components and parts to qualify as regional content after they are used or modified as part of the North American assembly process, as was the case under NAFTA.

“The interpretation that the United States adopted … is inconsistent with USMCA and the understanding shared by the parties and stakeholders throughout the negotiations,” Canadian International Trade Minister Mary Ng said in a statement.

The dispute mechanism process agreed to by Canada, the U.S. and Mexico when NAFTA was renegotiated in 2019 is what will be placed into effect to resolve the dispute. The new rules don’t take effect until 2025.

 

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