The U.S. could ultimately face billions of dollars’ worth of trade retaliation from Canada and Mexico after it lost a U.S.-Mexico-Canada Agreement dispute on automobile rules of origin.

The USMCA establishes a regional value content of 75 percent for passenger vehicles, light trucks, and auto parts (up from 62.5 percent under NAFTA), with similarly high content thresholds for core, principal, and complementary parts. Subject goods must have the specified amount of content made in North America to qualify for duty-free treatment under the USMCA.

In a case filed in 2022, Mexico and Canada argued that the U.S. is violating its USMCA obligations by not allowing parts that have acquired origin by meeting the applicable RVC threshold to then be considered 100 percent originating for purposes of determining whether the vehicles into which they are incorporated are originating.

The USMCA panel agreed, finding “greater support” for this argument and rejecting the U.S.’ position that there is a separate, self-standing origination requirement for core parts. The panel also pointed out that, based on the position that U.S. trade negotiators expressed to their Canadian counterparts and representatives of the auto industry while the USMCA was being negotiated, “the interpretation [of the auto rules of origin] advanced by Mexico and Canada was shared by the United States at that time.”

The panel decision cannot be appealed, and a spokesman for the Office of the U.S. Trade Representative said the agency will now “engage Mexico and Canada on a possible resolution to the dispute.” According to press reports, one possibility could be a U.S. effort to renegotiate the origin rules at issue, particularly given previous USTR statements that an adverse decision could threaten U.S. support for the USMCA. If no agreement can be reached, Mexico and Canada could be allowed to impose retaliatory trade measures against U.S. exports to those countries.

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