Automotive sector benefitted from USMCA amid pivot toward zero-emission, hybrid vehicles: USTR

The United States-Mexico-Canada Agreement (USMCA) has positively affected the automotive sector in the four years since its implementation and automakers are increasingly investing in zero-emission and hybrid vehicles, according to the US Trade Representative (USTR)

The USTR released a report on Monday July 1 about the operation of the USMCA with respect to trade in automotive goods.

On January 29, 2020, President Donald Trump signed the USMCA Implementation Act into law, and the USMCA entered into force on July 1, 2020. The USMCA was established to support fairer trade and economic growth in North America, according to the USTR.

A mandated six-year review of the USMCA is scheduled for 2026.

The USMCA’s Rules of Origin (ROOs) – used to determine whether a good qualifies as an originating good under the agreement – for motor vehicles require a specific amount of North American content in the final vehicle to qualify for duty-free treatment under the USMCA.

The USMCA requires that at least 70% of a vehicle producer’s steel and aluminium purchases originate in North America.

The duty-free treatment has helped to boost North American production and incentivized more investments in North American automotive production, increasing the competitiveness of the North American automotive sector, according to the USTR.

Automotive industry shifting toward zero-emission, hybrid vehicles

The automotive industry is also in a “period of transition,” according to the USTR, with automakers making investments to pivot toward zero-emission and hybrid vehicles.

Automakers are preparing for full enforcement of the ROOs when their Alternative Staging Regimes (ASRs) – which would permit a longer period of transition to help ensure that future production is able to meet the new rules – expire beginning in July 2025, the report said.

“The most challenging part confronting the industry is that it’s in transition from internal combustion energy to electric vehicles, and it’s going to be difficult to meet the ROOs in the electric vehicle setting,” Dan Ujczo, senior counsel for international trade and transportation at Thompson Hine, told Fastmarkets on Tuesday July 2.

But according to the USTR’s report, some automakers expressed concerns that flexibilities may be required after the ASRs expire, given the limitations found in the burgeoning domestic battery manufacturing and EV markets.

Stakeholders in the auto industry have also suggested that the US consider seeking adjustments to the USMCA ROOs to encourage North American production of key components in EV and autonomous vehicles, the report said.

Stakeholders have also expressed a desire for more information and transparency around the USMCA ROOs and how they are enforced, according to the report.

Furthermore, the USTR highlighted that several producers requested ASRs for electric vehicles and hybrid electric vehicles due to currently thin supply of domestic lithium-ion batteries necessary to meet the standard rules of origin.

Despite high levels of investment under way to ramp up North American battery production, much of that investment will not be fully realized until after 2025, leading to some producers relying on non-originating batteries and cells, the USTR said.

Mexico’s role in USMCA in question

The USMCA could be an example of how free-trade agreements can work, Steel Manufacturers Association (SMA) president Philip Bell said in a press conference at the Metals Service Center Institute (MSCI)-SMA Annual Meeting on June 3.

“The USMCA is a very formidable, powerful trading bloc, and you have to live up to the spirit of that agreement. In order to do that, you have to do two things: You cannot be a haven for transshipment, and you cannot be engaging in import surges of certain products,” Bell told reporters, referring to a recent surge in Mexican imports of aluminium and steel.

At the press conference, MSCI chief executive officer Bob Weidner highlighted concerns about non-market economies that “perhaps are circumventing and breaking the trade rules by bringing products in through Canada or through Mexico.”

Ujczo told Fastmarkets that “the truly challenging part of the review [of USMCA in 2026] is China investment’s in creating electric vehicles in Mexico and using USMCA to bring them in – that’s something the US will never allow to happen.”

Domestic steelmakers Cleveland-Cliffs and Steel Dynamics have also expressed hesitancy about Mexico’s role in the USMCA.

“USMCA? Rest in peace, the name will change to USCA when it’s up for review in 2026, the M will be gone. Mexico is a transshipment ground,” Lourenco Goncalves, CEO and chairman of Cleveland-Cliffs, said at the Global Steel Dynamics Forum 2024 on June 17.

The CEO reiterated his stance a week later at a press conference alongside union leaders and US Senator Sherrod Brown at the company’s Cleveland Works plant in Ohio.

“We need to keep Mexico outside of this trade agreement that has been convenient for Mexico and nobody else,” Goncalves said on June 26.

But it will be challenging for North America to compete globally without Mexico, Ujczo told Fastmarkets.

“I can envision a scenario where the deal is flipped, but we’re a long way from there. The question is, how do you keep Mexico in particular from being a backdoor to the rest of the world? It’s going to be challenging,” Ujczo said.

Mark Millett, CEO of domestic steelmaker Steel Dynamics (SDI), echoed a similar sentiment at the Global Steel Dynamics Forum in June.

“There is friction [in Mexico] right now. They need to change or adhere to rules we put in place. Generally speaking, the Mexican market is growing… Mexico is a strong market for us,” Millett said.

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