We have two major disputes with the United States under T-MEC: the energy sector and rules of origin for the automotive sector. Why is there so much talk about oil and power and so little about a dispute that could define the future of the North American auto industry?
Our concerns may be misplaced. I do not want to say that the energy industry is unimportant, quite the contrary. Our viability and our economic competitiveness depend on it. Rather, I intend to draw attention to how little attention the controversy that Mexico and Canada have filed against the United States in the auto industry has received.
The dispute centers on how the regional content percentage of a vehicle produced in North America is calculated. Everything indicates that the United States has gone beyond its interpretations and wants to impose something that would be detrimental to its regional partners. The issue entered the consultation phase in September last year. Canada closed ranks with Mexico against the United States. In March, the controversy committee was installed and the Uruguayan Elbio Roselli was named president. The hearing process is already over. The resolution is expected to be announced next November. If the panel determines that there has been a violation of the T-MEC, countries will have 45 days to agree on a solution, which may involve eliminating the source of the conflict or putting in place compensation.
There are many reasons to devote more time and effort to this issue: what is at stake is the reorganization of an industry which, for Mexico, captures 20% of foreign investment; it generates 3% of GDP and nearly 22% of manufacturing employment. In the first half of 2022, the production of transport vehicles and automotive parts contributed 23.6% of our exports to the United States, while oil barely reached 6.03%. 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 stipulated that 6.5% of a vehicle’s content must come from the North American region and imposed no conditions as to the country of origin of the steel and aluminum contained in the car. Auto parts manufacturers were not required to have a percentage of regional content. There were also no restrictions on which parts of the car or truck had to be produced in North America and which parts could be sourced from other parts.
This “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, great attention has been paid to closing these windows. Now, 75% of critical vehicle parts must be produced in the United States, Mexico or Canada. These are the 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. At least 70% of steel and aluminum in vehicles must be made in North America.
Since the entry into force of the T-MEC, the United States has tried to impose an interpretation of the rules of origin which “breaks” with what Mexico and Canada claim to have been negotiated. During the quarter century of integration of the North American automotive industry, a certain flexibility had prevailed. Due to “usages and customs”, the practice of rounding has been considered good, in which if a piece has 75% regional content, it is rounded to 100% and then calculates the regional content of the whole of the vehicle. Canada and Mexico support the continuation of this practice. The United States supports adding only the percentage from the region. No rounding. If the American position were to prevail, it would be very difficult to meet the standards for Mexicans and Canadians. They will be “sentenced” to pay tariffs of 2.5% so that their cars can enter the United States. They will end up losing investment and market share.
This is the first major dispute that has arisen within T-MEC. On the calendar, he is 10 months ahead of the energy policy controversy 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 for Mexico and Canada to obtain a favorable resolution from the Panel, but… the auto industry has a symbolic component for the United States that prevents them from giving in. The interests of big business are at stake, but also pressure from unions, particularly those in the United States and Canada. Hearings were held on August 2 and 3 and the judgment will be rendered at the end of November. How this issue is resolved, including the reaction of the side that is not favored, will set a precedent for controversy over Mexican energy policy. What moral will we draw from this fable?