Former USMCA Negotiator Says Customs Union for Cars Could Simplify ROO

However, given the 2.5% most favored nation tariff on autos, "there are limits" to how effective USMCA can be in driving production to North America and keeping Asian producers from getting a back door into the U.S. market, he said.

"If you dial the restrictions up too much," he said, auto companies producing in Mexico will choose not to ask for USMCA tariff-free access. "We have seen the number of cars that don’t comply has increased pretty significantly," he said. In a report from the Office of the U.S. Trade Representative to Congress last year (see 2407020032), 20% of imported auto parts didn't claim USMCA benefits, and about 8% of new cars were brought in by importers forgoing the tariff benefit; almost all were from Mexico.

"That indicates to me you’ve pushed the auto rules of origin as far as they can be pushed, assuming you have 2.5%," Mahoney said.

He said he suggested that, during the USMCA review in 2026, the three countries agree to a common external tariff on autos and auto parts. If that happened, "you could make the rules of origin less complex," he said. "I think we should look at that approach for any manufactured good you want to bring back to North America."

During the panel discussion at the Washington International Trade Association annual conference on Feb. 10, Mahoney, former Canadian lead negotiator Steve Verheul and former Mexican chief negotiator Kenneth Smith Ramos agreed that the USMCA would be irrelevant if President Donald Trump followed through for any length of time on 25% tariff on Canadian and Mexican goods.

"Whatever the Trump administration wants [in the USMCA renegotiation], the price for that has got to be some enduring peace on the tariff front," Mahoney said.

He said it can't be that "six weeks later, something else comes up, and we have renewed tariff threats." Trump threatened both to shut the border with Mexico in 2019, and to impose 5% tariffs on Mexican goods, escalating monthly if they didn't control migration. Both threats were after the initial NAFTA renegotiation was done, and before House Democrats got more changes made in exchange for their approval of the treaty.

Verheul agreed. "What is in the best interest of all three countries is some kind of enduring peace." He said if there were 25% tariffs on all North American imports, Mexico and Canada would be treated worse than the rest of the world, which he said would create "a huge opening for China."

Smith Ramos said, "These constant tariff threats also create political difficulties" in the partner countries. He said that Mexican President Claudia Sheinbaum has been willing to collaborate with the U.S. on immigration and drug trafficking. If the U.S. were to impose tariffs, that would drive Mexican citizens to demand retaliation. "I think that would be unfortunate," he said.

Where Mahoney and Smith Ramos diverged was over the legitimacy of the panel ruling on how the auto rules of origin should be calculated. Smith Ramos argued that the U.S.'s decision not to comply with the panel ruling that roll-up is allowed undermines the credibility of the agreement. Mahoney said he was disappointed that Canada and Mexico brought the case forward, calling it an "attempt to dilute the auto rules of origin."

Smith Ramos said that, from the Mexican perspective, his country is open to having common tariffs on certain products, like electric vehicles, and talking about investment screening. He said he knows the U.S. will likely seek to reopen the chapter on automotive rules of origin, but said the countries need to be careful not to increase costs for producing vehicles in North America.

"From the Mexican perspective … hopefully it will not be all chapters in the agreement" that are reopened during the review, he said.

All the speakers agreed that trade and manufacturing integration have increased across North American borders in recent years, and that it's good for all three countries. Mahoney said two-way trade with Mexico is up 60% since ratification, and is up 45% with Canada.

But Canada and Mexico said the threat of 25% tariffs on Mexico and Canada over migration and drug smuggling since Trump returned is undermining confidence in their countries that the U.S. is a reliable trade partner. Verheul said, "We thought that [the renewed NAFTA] provided us with a degree of predictability and stability."

Smith Ramos added that officials in Europe, South America and Asia also are wondering how reliable the U.S. market is.

"They can only imagine what’s going to happen to them, if the U.S. is willing to do that to its number one and number two trading partners."