Canada to file complaint against U.S. over auto industry rules

Canada to file complaint against U.S. over auto industry rules

Newly assembled vehicles are seen at the Toyota Motor Manufacturing of Baja California in Tijuana, Mexico on April 30, 2017. OTTAWA, January 13, Reuters -- Canada will sign onto a complaint against the United States over its interpretation of how free trade should apply to the continental auto industry, another sign of souring ties between the North American neighbors.

Trade Minister Mary Ng said on Thursday that Canada would join Mexico in requesting a dispute settlement panel under the terms of the U.S.- Mexico-Canada USMCA trade pact.

The two countries want to settle differences over how to apply automotive sector content requirements under the treaty, which came into effect in 2020, replacing the North American Free Trade Agreement NAFTA Mexico and Canada, and are unhappy about proposed U.S. tax breaks for American-based manufacturers of electric vehicles. They say this could undermine the highly integrated North American auto industry. Under the USMCA, 75% of the vehicle's components must originate in North America to be able to qualify for tax-free status, up from 62.5% under NAFTA.

Mexico and Canada favor an easier interpretation of the regulations than Washington, which sought an overhaul of the NAFTA when Donald Trump became president in order to protect manufacturing jobs.

Ng said that the interpretation that the United States adopted is inconsistent with the USMCA and the understanding shared by the parties and stakeholders throughout the negotiations. The U.S. Trade Representative expressed confidence that its interpretation was consistent with the USMCA.

Adam Hodge said by email that the rules of origin were needed to attract new investment and create good jobs.

Flavio Volpe, the president of the Canadian Automotive Parts Manufacturers' Association, said the U.S. approach might persuade manufacturers to use cheaper parts from outside North America and accept the 2.5% tariff that the US would impose on their vehicles.

The biggest loser would be the U.S. companies that supply around 55% of all auto parts used in North American production, he told the Canadian Broadcasting Corp.

Canada's decision came as deputy trade ministers from the three USMCA partners held an initial meeting on Thursday. In a joint statement, there was no mention of the automotive dispute and instead focused on efforts to cooperate on labor, environmental, small business, regional competitiveness and state enterprises issues.

Joe Biden's election did nothing to improve trade tensions with Ottawa that had simmered under Trump. A USMCA panel last week said Canada's dairy practices were in violation of the accord and Ottawa launched a challenge last month against U.S. duties on softwood lumber.

Washington is unhappy about a proposed Canadian tax on digital services and reiterates its complaints on Wednesday.