Trade representatives from the US, Canada, and Mexico are hammering out a new deal that is intended to minimize tariffs, maximize local content, and benefit economic development across North America – this deal will affect those shopping for cars. It’s hard to know exactly how they will be affected, though. It’s even harder to think long-term about such things, as changing administrations in Washington often bring a completely new perspective to trade relations.
Dodge Challengers on the assembly line in Brampton, Ontario, CanadaStellantis
The previous North American Free Trade Agreement (NAFTA), which took effect Jan. 1, 1994, allowed US automakers to assemble cars in Mexico and Canada, and import them to the US without penalty. But those vehicles had to meet strict “Rules of Origin,” meaning at least 62.5% of a vehicle’s parts had to originate in North America. President Trump’s first administration terminated NAFTA on June 30, 2020, and it was entirely replaced the next day with the United States-Mexico-Canada Agreement (USMCA).
Stellantis plant in Saltillo, MexicoStellantis
Six years later, Trump wants a better deal to address trade imbalances, stop foreign goods from bypassing US tariffs, and – here’s a big sticking point for the neighbors to the north and south – to keep manufacturing jobs in the US. The president wants to penalize the offshoring of US manufacturing to Mexico or Canada, even though the auto industry has spent the past 30 years configuring their operations and supply chains to treat North America as one big free trade zone. If Trump’s goal with USMCA 2.0 is to make cars more affordable in the US, it seems unlikely to happen if automakers are spending billions to tear up viable operations and build new brick and mortar.
Public Posturing, But Not By Canada Or Mexico
So far, talks about new terms for USMCA (as required every six years), have been tense and complicated. Automotive analyst Michael Robinet, vice president of forecasting at S&P Global Mobility, says there’s “at least a 40% chance of a trade agreement, probably well before the US midterm” elections this fall. That means certain politicians are motivated to reach a deal by September, Robinet says during a webinar hosted by the Automotive Press Association.
“I think it’s been well known that this one is, one plus one plus one equals three. It would be almost impossible to negotiate an agreement with one player as opposed to two.”
–Michael Robinet, VP of Forecasting at S&P Global Mobility
And yet, US trade representatives have been talking about a bilateral trade agreement, negotiating separate deals with each country. “There’s probably not a lot to be gained in that, either, and I think the US administration understands that, maybe not publicly, but certainly privately,” says Robinet, who’s originally from Canada.
As for the tone and tenor of the latest talks, he notes “a lot of public posturing” from the US side. In response, “I think that both the Mexicans and the Canadians have kind of gone a little bit underground” with their concerns rather than airing them publicly. “What we understand is that there are some movements being made behind the scenes,” Robinet says.
Related
Automakers Warn ‘America First’ Could Kill The Last Cheap Cars We Have
Tariffs could force automakers to axe remaining affordable models like the Civic and Corolla.
He refers to the talks as “some of the most difficult trade negotiations that have ever occurred, but… there is a lot of scar tissue in Canada and in Mexico from all of this, and increasingly in the United States as well.” The new USMCA 2.0 is likely to meet US demands for some level of tariff on vehicles built in Canada or Mexico and shipped into the US.
“That seems to be table stakes for the US. We hope that’s probably not the case, but it probably would be the case.”
Whatever agreement is approved, it’s likely to require a certain threshold of US content for vehicles shipped in from Canada or Mexico, which means detailed tracking will be necessary for all value added in the US, in Canada, and in Mexico. “How that is calculated is really up for grabs. It could be at a platform level, an OEM level,” Robinet says. “It could be any number of ways it’s calculated, but it would be a very complicated calculation.”
Beyond North American vehicle content, automakers or suppliers will also need to track content from Thailand, China, Europe – everywhere.
USMCA 2.0 scenarios as outlined by Michael Robinet from
S&P GlobalS&P Global
‘Here’s Our Tariff. Have A Nice Day’
“I don’t want to scare suppliers, but we’ve been telling them this for a while: It’s going to be an accounting nightmare.” While NAFTA required 65% of a vehicle’s content to come from North America, certain USMCA proposals have pushed for more than 75%.
Robinet outlines two other potential outcomes for the USMCA 2.0 (pictured above) that would be less than ideal. A “zombie free trade agreement,” as he described it, would strip out a number of different industries, perhaps including autos, which leaves an agreement without muscle. The least favorable outcome would resurrect “most favored nations” tariffs from some 80 years ago. “In other words, ‘Here’s our tariff. Have a nice day.'”
Ford CEO Jim Farley. DearbornFord
There are two other important factors in the USMCA talks: the Iran War and the US trade war with China. The US might be crafting the new pact specifically to keep Chinese automakers and suppliers from locating not only in the US but also in Canada and Mexico.
“How does that get controlled? Can you keep them (Chinese automakers) at bay for a period of time? How long could that last?” he says.
Meanwhile, war in the Middle East is pushing up fuel prices and shipping costs for a number of raw materials necessary for vehicle production globally.
Related
Supreme Court Declares Some Tariffs Illegal. Here’s What That Means For Automakers
2025 was a mess for the auto industry trying to deal with ever-changing US tariffs. But the new Supreme Court ruling may not move the needle.
In response, many automakers concerned that the war will drag on for months, are pulling ahead vehicle production that may have been slated for 2027. Normally, if inventories were rising, automakers might “take the foot off the accelerator… but there seems to be less willingness to do that,” Robinet says.
That’s because automakers who may have access to materials at a fixed price would opt to build vehicles while they can, while keeping a close eye on key economic indicators. Inflation in the US, for instance, “has got us very concerned from an affordability perspective, from a disposable income perspective,” Robinet says, “and also the fact that interest rates will not be coming down to try and keep that inflation under control, and that’s going to impact automotive lending rates.” And it likely means further price creep for your next new car.
Source: S&P Global
