Carmakers Could Be Less Competitive if U.S. Wins Rules of Origin Spat

The president of Mexico’s automotive industry association says some manufacturers could be disadvantaged by having to pay tariffs

José Zozaya, executive president of the Mexican Automotive Industry Association.
January 18, 2022 | 03:51 PM

Mexico City — The U.S. government’s interpretation of the regional rules of origin for automobiles produced in North America established in the USMCA free trade agreement with Canada and Mexico could generate differentiated effects among carmakers in Mexico.

Some assemblers complying with the regional content rules in accordance with the U.S. government’s interpretation would leave other producers at a disadvantage, José Zozaya, executive president of the Mexican Automotive Industry Association (AMIA), said in an interview with Bloomberg Línea.

“Not all automakers would be affected. Those that do not comply with the U.S. government’s interpretation would have to pay a tariff, and would increase their prices in the U.S., thus becoming less competitive.”

José Zozaya

The former president of Kansas City Southern Mexico, who now represents Mexico’s automotive sector, said he preferred not to say which automakers do comply with the U.S. government’s interpretation of the rules of origin.

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Currently, a dozen automakers have 20 vehicle assembly plants in Mexico, among them Volkswagen, Audi, Nissan and Ford, and from where 88% of production is exported, and of which 76% of exports are for the U.S. market.

The U.S. government is taking a strict stance on requiring that essential auto parts be of North American origin. The U.S. is the second-largest market for auto sales on the planet.

However, Mexico and Canada disagree on the U.S. interpretation of the rules of origin established in the USMCA, the free trade agreement that governs the trade relationship between the three countries and came into force in July 2020.

Canada and Mexico consider that by reaching 75% regional participation, the USMCA allows them to comply with the 100% regional requirement; but for the U.S. that figure is not high enough.

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On Jan. 6, Mexico made a formal request to initiate a dispute panel against the U.S. interpretation of the rules of origin for the automotive sector. Canada joined Mexico’s request a week later.

Read More: Trudeau Weighs Auto-Content Rules as Next U.S. Trade Flashpoint

The dispute panel is the second stage of a process initiated in August 2021, when the three countries participated in a consultation process, but in which they failed to reach an agreement.

The AMIA, which agrees with the Mexican government’s position on the issue, has sought an understanding with Washington, but according to Zozaya, the U.S. government’s position “has been very firm”.

The association will remain attentive to the issue during the dispute panel, which could be resolved in the second half of 2022, although Zozaya clarified that this is a legal issue that concerns all three governments.

Disincentives to Investment

For Zozaya, there are currently a couple of issues that could stymie the attraction of automotive investment to Mexico.

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The U.S. aim to incentivize the purchase of locally produced electric vehicles could have an adverse effect on the attraction of possible future investments for the auto parts sector for this type of vehicles, he said.

“The establishment of incentives for electric vehicles is fundamental for the industry. We do not agree that these incentives run counter to the USMCA and are established in a discriminatory manner.”

José Zozaya

Meanwhile, the Mexican government’s policy of regularizing cars that entered the country illegally across the border with the U.S. sends a bad signal regarding compliance with the rule of law, and which is a key variable when making investment decisions, he added.

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