We have two major disputes with the United States in the context of the T-MEC: the energy sector and the rules of origin for the automotive sector. Why do we talk so much about oil and electricity and so little about a dispute that may define the future of the North American auto industry?
Our concerns are misplaced, perhaps. I don’t mean to say that the energy industry is unimportant, quite the opposite. Our viability and economic competitiveness depend on it. Rather, I intend to draw attention to the little attention that the controversy that Mexico and Canada have filed against the United States in the automotive industry has received.
The dispute has to do with how the percentage of regional content that a vehicle produced in North America has is calculated. Everything indicates that the United States has exceeded its interpretations and wants to impose something that would be detrimental to its regional partners. The matter entered the consultation phase in September last year. Canada has closed ranks with Mexico against the United States. In March, the controversy panel was installed and the Uruguayan Elbio Roselli was appointed as its president. The hearing process has already concluded. The resolution should be announced next November. If the panel determines that there was a violation of the T-MEC, the countries will have a period of 45 days to agree on a solution that could involve the elimination of the source of the conflict or the establishment of compensation.
There are many reasons to devote more time and effort to this issue: At stake is the reorganization of an industry that for Mexico captures 20% of foreign investment; it generates 3% of GDP and almost 22% of manufacturing employment. In the first half of 2022, the production of transportation vehicles and auto parts contributed 23.6% of our exports to the United States, while oil barely reached 6.03 percent. Around one million people work in this industry, which is the undisputed engine of economic life in 11 states: Baja California, Sonora, Coahuila, Puebla, State of Mexico, Guanajuato, Nuevo León, Aguascalientes, Morelos, San Luis Potosí and Tlaxcala.
Where is the controversy? NAFTA established that 62.5% of the content of a vehicle should come from the North American region and did not put conditions on the country of origin of the steel and aluminum contained in the car. Auto parts manufacturers were not required to have any percentage of regional content. There were also no restrictions related to which parts of the car or truck should be produced in North America and which could be from other parts.
That “looseness” opened the door for many manufacturers in Europe or Asia to build vehicles in North America “stuffed” with parts produced in other parts of the world. In the T-MEC a lot of attention was paid to closing those windows. Now 75% of essential vehicle parts must be produced in the United States, Mexico or Canada. This is engine, chassis, body, axle, steering system and battery. Between 40 and 45% of the car must be produced by workers who earn at least $16 an hour. 70% of the steel and aluminum in vehicles must be made in North America.
Since the T-MEC entered into force, the United States has tried to impose an interpretation of the rules of origin that “breaks” with what Mexico and Canada claim was negotiated. In the quarter century of integration of the North American auto industry a certain flexibility had prevailed. Due to “uses and customs” the practice of rounding was taken for granted, in which if a piece has a regional content of 75%, it is rounded up to 100% to then calculate the regional content of the entire vehicle. Canada and Mexico defend maintaining this practice. The United States is in favor of only adding the percentage that is from the region. No rounding. If the US position prevailed, it would be very difficult to meet the standards for Mexicans and Canadians. They will be “condemned” to pay tariffs of 2.5% so that their cars can enter the United States. They will eventually lose investments and market share.
This is the first major dispute that arose in the T-MEC. On the calendar, it is 10 months ahead of the controversy over energy policy that the United States and Canada have filed against Mexico. With so much at stake, it will not be easy to find a solution. In principle, it would seem logical that Mexico and Canada obtain a favorable resolution from the Panel, but… the automotive industry has a symbolic component for the United States that makes it difficult for them to yield. At stake are the interests of large corporations, but also pressure from unions, especially those in the United States and Canada. Hearings were held on August 2 and 3 and the ruling will be ready by the end of November. How this matter is resolved, including the reaction of the side that is not favored, will set a precedent for the controversy over Mexican energy policy. What moral will we draw from this fable?
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