U.S. auto industry faces uncertainty without USMCA extension

The U.S. auto industry is entering a new phase of uncertainty as the Trump administration said the USMCA trade agreement between the United States, Mexico and Canada will not be extended until Wednesday. This could trigger a years-long review process or termination of the agreement if a deal is not reached by 2036.

The United States-Mexico-Canada Agreement, which replaced the North American Free Trade Agreement, was created during President Donald Trump’s first term in 2020, but the administration has soured on the pact that governs nearly $2 trillion annually in goods and services between the three countries.

The auto industry represented about 18% of America’s trade with neighboring countries last year, according to industry data, making it a key sector in the discussions. Automakers and others monitoring the talks worry that reopening the deal could create additional trade uncertainty that would lead to lower investment and fewer jobs.

“If we let this continue for too long, it will be very painful for everyone,” said Diego Marroquín Bitar of the Washington, D.C.-based think tank. Center for Strategic and International Studies. “It’s the last thing this area needs.”

There are also concerns that the United States could withdraw from the agreement due to the Trump administration’s aggressive negotiating tactics involving tariffs, trade and other issues.

The United States, Mexico and Canada could have agreed to a 16-year extension by Wednesday but will instead move to an annual review process.

US Trade Representative Jamieson Greer He said in May that the United States wanted to strengthen North American rules of origin “in a way that increases the U.S. content in these goods” to increase domestic production.

Bitar also said the Trump administration’s public discussions have been wide-ranging, touching on non-trade issues such as immigration, crime and other connections, which could make this round of talks more challenging than when the USMCA was established.

Bitar said, “Everything is on the table. Not only commercial issues.” he said. “The more things are on the table, the longer the negotiation takes, and the more uncertainty that creates.”

The US auto industry has already dealt with a lot of uncertainty this decade. pandemic production disruptions and supply chain shortages, and ongoing changes to tariffs and other regulations. It is now preparing for the resumption of USMCA talks.

Automakers operating in the U.S. want the agreement to remain an agreement between the three countries that “strengthens rather than dismantles this critical economic foundation” for North American trade. Letter to Greer One of the leaders of the largest automotive trade groups in the United States

“We support U.S.-Mexico bilateral interaction and encourage tripartite discussions to support an efficient and effective review that will ultimately expand the USMCA into a tripartite agreement,” organizations representing the vast majority of U.S. automakers, suppliers, and dealers wrote May 7.

Trade groups have argued that companies are spending billions of dollars to meet existing USMCA standards and that many auto companies are already investing more in the United States.

According to US automotive lobby group data, USMCA generated $182 billion in investment in North America, 86% of which was declared for the United States.

Across the northern border, Flavio Volpe, president of the Canadian Automotive Parts Manufacturers Association and a member of the Canadian prime minister’s council on Canada-U.S. relations, said he was optimistic a deal could be reached in the fall.

“I’m optimistic about where we’re headed,” he told CNBC in a phone interview Monday, citing the growing controversy and public comments. “There are real issues on the table, but in my opinion, there are none.” [those] It is insurmountable.”

One of the key issues for automakers and others in the industry is the deal’s rules of originThose who determine which country a product comes from and which goods are eligible for preferential treatment such as reduced tariffs or duty-free trade.

The US automotive market has expanded into Canada on the basis of free trade in North America since the launch of NAFTA in 1994, and has strongly increased its presence in Mexico. This led to a large portion of parts and vehicles crossing borders before being assembled in one of the countries.

The USMCA currently requires a 75% “regional value content” for passenger vehicles and light trucks sourced from North America. trump management reportedly It wants to increase this level to 82%, with 50% of this value produced in the USA

There is currently no requirement to separate part content between those manufactured in the United States and those manufactured in Canada. New rules will require such a distinction, which will mean creating new processes.

“The thing people talk about most is regional value content, but it’s the U.S. content that really matters,” said Mark Wakefield, partner and global automotive market leader at consulting firm AlixPartners. “Some of them don’t even have a plan for how to do any of this, and so it’s going to be a bumpy and pretty expensive road.”

AlixPartners estimates a premium of up to 20% for moving a product from Mexico to Canada, and an increase in costs of up to 50% for moving some parts from China to the US

BCG also suggests that setting standards too high could cause some companies to produce less in the United States; By focusing on producing vehicles with the cheapest parts outside the U.S. rather than trying to meet the standards, automakers could reduce the declared value of vehicles for import to a level where paying duty on a cheaper product would still be financially beneficial, he said.

“In this case, we cannot get additional US content,” Arora said. “This is not a small spike, and because it is not a small spike, there may be some unintended consequences.”

About a dozen vehicles, including some single models, meet the current 75% threshold. None of them are at 80%; The Volkswagen ID.4 all-wheel-drive Pro tops the 2026 model year parts content list with 76% US/Canada content. published by National Highway Traffic Safety Administration.

Automotive executives have said years and billions of dollars will be invested in onshore production to ensure vehicles sold in the United States have more American content. They also argued that the United States may not be equipped to handle the collection and processing of some parts and raw materials.

S&P Global Mobility said there are an average of 20,000 parts in a vehicle, down to its nuts and bolts. Parts can come from anywhere from 50 to 120 countries.

BCG’s Arora noted that one way to potentially boost U.S. content would be to include software of origin in rules of origin, a growing part of new vehicles. This will help increase the percentage of a vehicle that qualifies as US content, he said.

One of the US government’s main goals is to increase production in the US, but it also wants to shift the American auto supply chain away from China. The Asian nation is rapidly expanding beyond its home base to flood markets with more affordable, subsidized vehicles in South America and Europe.

AlixPartners said it believes the ideal outcome for USMCA 2.0 would be to focus on competitiveness with China rather than Mexico or Canada, minimize costs added to U.S. vehicles, and support corporate investment, among other things.

“People talked about some sort of ‘fortress America’ and… it’s really supposed to be North America,” Wakefield said. “[If] “If the goal is really to confront China, then there’s little point in focusing so much on Mexico and Canada against the United States.”