Canada joins Mexico's official complaint arguing U.S. violating trade pact over auto parts provision

Canada is joining Mexico's official complaint today requesting a dispute settlement panel to resolvea claim that the U.S. is violating the new NAFTA by insisting on a stricter interpretation of a key provision on auto parts.

Motor vehicles arethe most valuableproduct traded between the three countries. Canada argues that the way the U.S. views theCanada-U.S.-Mexico Agreement on trade (CUSMA) would make it harder for Canadian vehicles and essentialauto parts engines, transmissionsand steering wheels to qualify as duty-free.

Canada argues the U.S.'s view of the rules is "inconsistent" with the trade deal the three countries agreed to.

"Canada, Mexico and the United States would all benefit from certainty that CUSMA is being implemented as negotiated, and Canada is optimistic that a dispute settlement panel will help ensure a timely resolution of this issue," wrote International Trade and Export Promotion MinisterMary Ng in a statement issued Thursday.

Canada and Mexico havebeen working to resolve this disputefor more than a year.

The dispute centres on how the three countries define a North American vehicle. Aprovision in CUSMAstates that by 2025,75 per cent of each vehicle and of certain core components must be manufactured in the country of originin order to cross a North American border duty-free. If those products fail to meet that threshold, the U.S. can charge tariffs under World Trade Organization rules.

The U.S. interpretation of the provisionis more stringent than Canada's andcouldmake it harder for entire vehicles to qualify for duty-free treatment.

Mexico and Canada argue that if 75 per cent of an essential car componentismanufactured regionally, that's enough todefine it as aduty-freeNorth American part in a fully-assembled vehicle.The U.S. doesn't agree which could make it harder forentire vehicles containing those parts to meet the 75 per cent threshold for duty-free trade.

Canada says U.S. interpretation would be a burden

A Canadiansenior government official told CBC Newsthe U.S. interpretation could be overly burdensome for the industry and regulators.

Flavio Volpe, president of the Automotive Parts Manufacturers' Association, said that if the U.S goes ahead with its interpretation, it could have major implications across North America.

Volpe said auto makers might optnot to try to comply with the new rules to instead source auto parts outside of North Americaand accept the 2.5 per cent WTO tariff.

"The biggest winners are the low-cost Asian or Eastern European countrieswho make those same parts with very cheap labour," said Volpe. "They'll just become part of the Canadian cars we all see on the road today."

He said that undermines the entiregoalof theprovision in CUSMA to boost production in North America.

Volpe said that whileCanada, Mexico and the U.S. would suffer,theU.S.has the most at stake since it makes about 50 per cent of all car parts in North America.

"The Trump administration, thoughit was tough and sometimes brainless in the negotiation of this agreement, ultimately came to a tripartisan place with rules weall agree to," said Volpe.

Volpe said he was relieved when President Joe Biden took office but now believesthere are "a lot of very protectionist leaders in that administration as well."

"Some of us are really surprised to see the Americans go back on the commitments made during this negotiation," he added.

Dispute mechanism panel asked tosettle dispute

While re-negotiating NAFTA in 2019, Canada, Mexico and the U.S.agreed on a dispute mechanism process; that processwill now be used to settle this dispute.

The dispute resolution panel requested today by Mexico and Canada should have time to review submissions from all three countries and issue its report before the new rules take effect in 2025.

Ng wrote the Canadian government will "always stand up for our auto industry and workers as we build toward a sustainable economic recovery."

This matter is not related to Canada's dispute with the U.S. over its electric vehicle tax incentive for American-made vehicles.