US Likely to Exert 'Maximum Pressure' During USMCA Review

Dan Ujczo, senior counsel in Thompson Hine's international trade and transportation practice groups, wonders if the review will start sooner as a result of Donald Trump's reelection. Ujczo, who spoke on a Thompson Hine webinar last week, said the parties expected that the six-year sunset review would be far enough in the future that Trump would no longer be on the scene. If he had been reelected in 2020, he would have left office by the time the review started.

"Nobody planned for this contingency where President Trump came back," Ujczo said.

Ujczo said it's highly likely that the U.S. will say its leaders don't want to renew the agreement, but that wouldn't start a swift exit. What is very unclear from the language in the FTA is how the complaints that led to that announcement would get resolved. Ujczo asked, "Do you get the year to resolve this?"

Once a country party to the agreement wants the FTA to end, each country once a year for 10 years gets a chance to say whether it wants to continue the FTA.

White & Case, in a client note about how Trump's election will affect the sunset review, noted that if one country says it doesn't want to renew it through 2036, negotiators would meet until they were able to address the dissenting party's concerns, or until the FTA expiration in 2036.

"The exact procedure for conducting the review remains undecided and there is no precedent to follow. The USMCA’s text describes the review only in broad terms," the lawyers wrote. "If the parties decide to make amendments to the text of the agreement, Article 34.3 provides that the 'amendment shall enter into force 60 days after the date on which the last Party has provided written notice to the other Parties of the approval of the amendment in accordance with its applicable legal procedures.'"

"Renegotiate doesn’t mean we’re opening up the entire agreement," Ujczo said, but he thinks the changes will be more substantial than a few tweaks.

"The problem is this creates a very unstable investment climate," he said.

And, although the sunset clause doesn't have immediate ramifications for tariff benefits, Trump also will have the option of notifying Canada and Mexico that the U.S. is leaving -- and that would take effect six months after the notice.

"They like to put maximum pressure on," he said, and Trump might think that would force Canada and Mexico to make the changes he demands within six months.

White & Case noted that former U.S. Trade Representative Robert Lighthizer, after he left government and after a USMCA dispute panel ruled against the U.S. interpretation of auto rules of origin (see 2301110058), said the U.S. should renegotiate that auto text.

Ujczo, who represents auto companies, argues that the automotive sector has ramped up its investment and production in the three countries, because the regional value content rose from 62.5% to 75%. He said he understands the concern that Chinese companies could open assembly plants and core parts plants in Mexico, and, with access to the U.S. market, continue their rise as global players. China's BYD is the No. 1 EV manufacturer in the world.

Ujczo said the question is, how will politicians try to curtail Chinese participation in Mexico's auto manufacturing sector?

"You really can’t ratchet up the rules of origin in USMCA, because automakers are barely meeting those," he said.

When asked by International Trade Today if the higher number of Mexican cars entering the U.S. without claiming USMCA benefits is because of the U.S. ignoring the panel decision on how the rule of origin should be calculated, Ujczo said he doesn't think that's the reason.

"They just know they’re not going to make it," he said. He said it could be they could meet the standard, but "they don’t want to go through the administrative hassle" of proving the vehicles and parts and labor rates meet the USMCA rules.

"Which may be why the [proposed] 10% tariff comes into play," he said, because cars face only a 2.5% tariff.

The issue before the panel was that the U.S. says that if an engine or a steering system is 76% North American, the entire value of that core part should not contribute toward the vehicle's regional value content. Mexico, Canada, most automakers, and the panel all said that once a part qualifies, all the value of that part counts toward the vehicle's regional value content.

"That’s the way we’ve always done that, it’s called roll-up," Ujczo said. "It was decided against the United States' interpretation and the United States is just sort of sitting on it for this review."

In response to a question from International Trade Today about whether Canada is waiving its 6% tariff on cars for those that meet the regional value content using roll-up, but wouldn't without roll-up, Ujczo said that with the panel, Canada and Mexico all agreeing roll-up is legitimate, arguably, roll-up is "the law of the land."

He said that companies certify their own compliance with USMCA (or CUSMA, as it's called in Canada), and so "it’s not a question of: Is Canada allowing it?"

He said each company takes "reasonable care" to follow the FTA's rules of origin, as their compliance departments interpret it, and "it’s whether the customs authority in each of the countries are going to accept that, or subject it to audits."

Aside from auto rules of origin, other disputes that are likely to fuel U.S. demands are: better market access for U.S. exports of cheese and other dairy products to Canada; a change of direction from Mexico on its plans for genetically modified corn; and a rollback of Canada's digital services tax, he said.

Ujczo said some issues that could be tackled in a review that wouldn't be confrontational could be reducing regulations among the three countries, the competition chapter and how temporary entry of goods is handled. He said these could be good areas of discussion for the Trump-created DOGE, or Department of Government Efficiency, led by Elon Musk and Vivek Ramaswamy.

Wilson Center Fellow Earl Anthony Wayne, a former U.S. ambassador to Mexico, said that the U.S. and Canada are "moving to an aligned position" on trade with and investment from China, and it's yet to be seen "how much Mexico is going to line up on China. Right now, it looks like they're going to move in that direction, and argue that they're well lined up. But this will take a bit of work, and will take some sorting out."

White & Case attorneys noted that Canada is contrasting its approach with Mexico's, with Deputy Prime Minister Chrystia Freeland recently saying she "sympathizes with U.S. concerns that 'Mexico is not acting the way that Canada and the US are when it comes to its economic relationship with China.'"

White & Case said that Mexico's new undersecretary of foreign trade, Luis Rosendo Gutierrez, has said Mexico is trying to prioritize expanding its role in textiles, semiconductors, electric vehicles, batteries, rare earths, electronics and medical equipment in order to "further integrate value chains in North America."

However, Carlo Dade, director of Canada West Foundation's Trade and Investment Centre, speaking on a Wilson Center webinar last week with Wayne, was pessimistic that integrated value chains in North America is what Trump is looking for.

"I don't see the U.S. giving up the leverage," he said, by resolving the review, even after a few years, as Wayne suggested. "Look at how we're reacting to this review. They've got us by the shorts, and they're using that, so I don't see any reason for them to want to surrender that leverage."

He said a global tariff proposed by Trump is aimed to drive investment only to the U.S., not to the FTA region. "Why invest in Canada and Mexico to access the U.S. market when the only sure way to access the U.S. market is to invest in the U.S.? So I see the Trump administration just having us at this point every year, and bringing something out of us every year, and keeping us on a short leash with worries about the agreement. It's almost as if Lighthizer had designed this to have us in this position every year."