Canada joins Mexico in challenging US over auto trade rules, latest sign of tensions

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OTTAWA, Jan 13 (Reuters) – Canada will sign a complaint against the United States over its interpretation of how free trade should apply to the continental auto industry, another sign of deteriorating ties between North American neighbors.

Commerce Minister Mary Ng said Thursday that Canada would join Mexico in seeking a dispute settlement panel under the United States-Mexico-Canada (USMCA) trade pact.

The two countries want to settle disagreements over how to apply automotive content requirements under the treaty, which came into force in 2020, replacing the North American Free Trade Agreement (NAFTA).

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Mexico and Canada are also unhappy with tax breaks offered in the United States for American makers of electric vehicles. This, they say, could undermine the highly integrated North American auto industry. Read more

Under the USMCA, 75% of a vehicle’s components must come from North America to qualify for tax-exempt status, compared to 62.5% under NAFTA.

Mexico and Canada favor a softer interpretation of the regulations than Washington, which wanted an overhaul of NAFTA when Donald Trump was president to protect manufacturing jobs.

“The interpretation that the United States has adopted … is inconsistent with the USMCA and the understanding shared by parties and stakeholders throughout the negotiations,” Ng said in a statement. Mexico welcomed this decision.

US RESPONSE

The Office of the US Trade Representative said it was satisfied that its interpretation was consistent with the USMCA.

Spokesman Adam Hodge said by email that rules of origin were needed to attract new investment and create good jobs.

But Flavio Volpe, president of the Canadian Automotive Parts Manufacturers Association, said the US approach could persuade manufacturers to use cheaper parts from outside North America and accept the 2.5% tariff that the United States would then impose on their vehicles.

The biggest losers would be American companies that supply about 55% of all auto parts used in North American production, he told the Canadian Broadcasting Corp.

Canada’s decision came as deputy ministers of commerce from the three USMCA partners held a first meeting on Thursday. A joint statement made no mention of the auto dispute, instead focusing on cooperative efforts on labor, environmental, small business, regional competitiveness and state-owned enterprise issues.

The election of Joe Biden did little to improve trade tensions with Ottawa that had simmered under Trump. A USMCA panel said last week that Canada’s dairy practices violated the agreement and last month Ottawa launched a challenge against US softwood lumber duties.

Washington is also unhappy with a proposed Canadian digital services tax and reiterated its complaints on Wednesday. Read more

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Reporting by David Ljunggren; additional reporting by Dave Graham in Mexico City, David Shepardson and David Lawder in Washington; edited by Jonathan Oatis, Alexandra Hudson and Cynthia Osterman

Our standards: The Thomson Reuters Trust Principles.

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