This is a guest post by Karen Soriano, a recent Masters graduate in international economic policy from the Norman Paterson School Of International Affairs
With President-elect Donald Trump’s frequent social media pronouncements on trade, it would be a futile practice to fact-check every claim made. However, recent comments by Trump have sparked a flurry of reactions from Canadian officials on the dangers of Mexico as a back door for Chinese goods to enter the US and Canada. In this regard, Ontario Premier Doug Ford stated:
“You look at Mexico, they're importing cheap products – undercutting our hard-working men and women not only here, but in the U.S. – from China. They're slapping a ‘Made in Mexico’ sticker on and shipping it up and taking our hard-working men and women’s jobs away from them. Unacceptable.”[1]
In the days following this statement, Deputy Prime Minister Chrystia Freeland made the following comment along the same lines:
“We are perfectly aligned with the United States and that means we are not a back door to unfair Chinese traded goods. The same cannot be said about Mexico.”[2]
The Deputy Prime Minister further noted that Canada, unlike Mexico, had imposed tariffs on Chinese EVs and aluminum/steel, matching similar tariffs imposed by the U.S.
The perceived economic threat from China has many aspects these days, including the economic impact of Chinese imports on nascent industries and security concerns resulting from Chinese investment. In the context of the USMCA, as the Ford and Freeland statements allude to, one of the big concerns is that the rules of origin for autos may act as a loophole that allows Chinese auto parts used by factories in Mexico to be incorporated into finished vehicles sold in the U.S. and Canadian markets. This post explores the validity of this concern.
Auto Rules of Origin
Under the USMCA’s rules of origin, in order for a passenger vehicle to receive preferential treatment it must contain a regional value content (RVC) of 75%. This leaves only 25% of the car’s value to be potentially sourced from China. Moreover, the difficulty of meeting this threshold is increased, as there are different RVC thresholds for different parts of the car (core parts: 75%, principal parts: 70%, and complementary parts: 65%). Particularly significant is the core parts threshold, which includes the engine of a car, and in the case of an electric vehicle, the battery. Core components make up nearly 50% of a car’s value and in the case of electric vehicles, the battery alone makes up 40% of the value. This implies that an engine or battery wholly sourced from China would make the car ineligible for preferential treatment. This is particularly significant if one of the main Canadian concerns relates to its nascent electric vehicle industry.
Two more factors to take into consideration that limit Chinese components' presence in a USMCA-traded vehicle are the labor value content and the steel and aluminum requirement. The labor value content rule requires 40% of the automobile to be made by workers earning at least US$16 per hour. This means that of the 75% RVC, 40% of that must be, practically speaking, produced in the US or Canada. The labor value content further reduces the window of opportunity to claim Chinese products as Mexican after assembly. As previously mentioned, especially in the case of an electric vehicle, a battery with Chinese components assembled in Mexico would cause the car to no longer qualify given its large contribution to a vehicle’s value.
Finally, if the concern is centered around dumped materials being used to create these components and how that would affect key Canadian industrial sectors (i.e. steel and aluminum), it is further required that 70% of the total steel and aluminum used for the vehicle must be sourced from North America. This would essentially imply that not even the raw materials could be imported into Mexico and then sufficiently transformed to meet the requirements.
If vehicles with a certain percentage of Chinese components cannot meet the USMCA’s rules of origin, they would likely be classified as non-USMCA products and subject to the 27.5% tariff for Chinese vehicles and 102.5% tariff for electric vehicles.
With all this in mind, a large influx of “unfair Chinese traded goods” stemming from Mexico in the auto sector, particularly for electric vehicles, is unlikely, as the existing rules place limits on how much Chinese content can be included in these vehicles and still qualify for the USMCA’s zero tariffs. While it does not come as a surprise that Canada would want to align closely with the US to avoid Trump’s new tariffs, concerns that Mexico could act as a backdoor in the auto industry are probably overblown.
Nevertheless, with Canadian officials expressing these concerns publicly, there is a good chance that revisions to the existing rules of origin could be put on the agenda for the 2026 USMCA review. The current rules are strict, but they can always be made stricter, and there are likely to be calls for making it even more difficult to qualify for the USMCA tariffs while using Chinese content in a finished vehicle.
[1] Ford calls for Mexico to be excluded from North American trade deal,
https://www.ipolitics.ca/news/ford-calls-for-mexico-to-be-excluded-from-north-american-trade-deal
[2] Canada shares U.S. concerns about Mexican trade with China as possible trade talks loom,
https://abcnews.go.com/International/wireStory/canada-shares-us-concerns-mexican-trade-china-trade-116027009
