Auto sector benefits from USMCA amid shift towards zero-emission hybrid vehicles: USTR

On Monday, July 1, USTR released a report on the operation of the USMCA as it relates to trade in automotive products.

On January 29, 2020, President Donald Trump signed legislation implementing the USMCA, 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 USTR.

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

The USMCA rules of origin (ROO) – used to determine whether a good qualifies as originating under the agreement – ​​for motor vehicles requires that a specified amount of North American content in the final vehicle qualify for duty relief under the USMCA.

The USMCA requires that at least 70% of an automaker’s steel and aluminum purchases come from North America.

According to the USTR, the tariff exemption has helped boost North American manufacturing and encouraged greater investment in auto manufacturing in the country, making the North American auto sector more competitive.

Automotive industry moves to zero-emission hybrid vehicles

The auto industry is also in a “transition period,” according to USTR, with automakers investing in the transition to zero-emission and hybrid vehicles.

Automakers are preparing to fully implement ROO when their alternative phasing systems (ASR) – which would allow a longer transition period to help ensure future production complies with the new rules – expire from July 2025, the report said.

“The biggest challenge facing the industry is that it’s transitioning from internal combustion to electric vehicles, and it’s going to be difficult to meet ROO requirements for electric vehicles,” Dan Ujczo, senior counsel for international trade and transportation at Thompson Hine, told Fastmarkets on Tuesday, July 2.

However, according to the USTR report, some automakers have expressed concerns that more flexibility may be necessary once the ASR rules expire, given constraints in the growing domestic market for battery and electric vehicle production.

Automotive stakeholders also suggested the United States consider amending the USMCA ROO regulation to encourage the production of key components for electric and autonomous vehicles in North America, the report said.

According to the report, stakeholders also expressed a desire for more information and transparency regarding USMCA regulations and how they are enforced.

In addition, USTR highlighted that several manufacturers have requested ASR for electric vehicles and hybrid electric vehicles due to the limited supply of domestic lithium-ion batteries necessary to meet the standard rules of origin.

Despite significant investments to increase battery production in North America, much of that investment will not be fully realized until 2025, leaving some manufacturers reliant on batteries and cells from outside the U.S., USTR said.

Mexico’s role in USMCA is in question

The USMCA agreement could be a model for how free trade agreements can work, Philip Bell, president of the Steel Manufacturers Association (SMA), said at a news 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. To do that, you have to do two things: you can’t be a port of call for transshipment, and you can’t engage in surges in certain products,” Bell told reporters, referring to Mexico’s recent surge in aluminum and steel imports.

At a news conference, MSCI CEO Bob Weidner highlighted concerns about non-market economies that “may be circumventing and breaking trade regulations by sourcing products through Canada or Mexico.”

Ujczo told Fastmarkets that “the really difficult part of the (USMCA) review in 2026 is Chinese investment in electric vehicle manufacturing in Mexico and using USMCA to bring them in — that’s something the United States will never allow.”

Domestic steel producers Cleveland-Cliffs and Steel Dynamics have also expressed doubts about Mexico’s role in the USMCA.

“USMCA? Rest in peace, the name will change to USCA when it’s reviewed in 2026, and the M will disappear. Mexico is a transshipment point,” said Lourenco Goncalves, CEO and president of Cleveland-Cliffs, at the Global Steel Dynamics Forum 2024 on June 17.

The CEO reiterated his position a week later at a news conference attended by union leaders and U.S. Senator Sherrod Brown at the company’s Cleveland Works plant in Ohio.

“We have to keep Mexico out of this trade agreement that was convenient for Mexico and no one else,” Goncalves said on June 26.

However, it will be difficult for North America to compete globally without Mexico, Ujczo said in an interview with Fastmarkets.

“I can imagine a scenario where the deal is reversed, but we are very far from that. The question is, how do we stop Mexico from being a back door to the rest of the world? That will be a challenge,” Ujczo said.

A similar view was expressed by Mark Millett, CEO of domestic steel producer Steel Dynamics (SDI) at the Global Steel Dynamics Forum in June.

“There’s friction right now (in Mexico). They have to change or abide by the rules we’ve put in place. Overall, the Mexican market is growing… Mexico is a strong market for us,” Millett said.

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