US auto industry faces uncertainty without USMCA extension

The U.S. auto industry enters a new phase of uncertainty as the USMCA trade deal between the United States, Mexico and Canada is not expected to be extended by Wednesday, triggering what could be a year-long review process or an expiration of the deal if no deal is reached by 2036.

The United States-Mexico-Canada Agreement, which replaced the North American Free Trade Agreement, was concluded during President Donald Trump’s first term in 2020, but the administration has deteriorated on the deal that governs about $2 trillion a year in goods and services between the three countries.

The auto industry accounted for about 18% of America’s trade with its neighboring countries last year, according to industry data, making it one of the key sectors in the discussions. Automakers and others following the negotiations worry that reopening the deal could create additional trade uncertainty that would lead to lower investment and fewer jobs.

“If we let this go on for a very long time, it will be very painful for everyone,” said Diego Marroquín Bitar, a fellow at the Washington-based think tank Center for Strategic and International Studies. “This is the last thing the region needs.”

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

The United States, Mexico and Canada could have agreed on a 16-year extension by Wednesday, but are unlikely to meet that deadline. Rather, it opens an annual review process.

U.S. officials previously said they had no plans to extend the deal, as U.S. officials push for additional domestic investment and benefits under the deal.

U.S. Trade Representative Jamieson Greer said in May that the United States wanted to strengthen North American rules of origin “in ways that increase the U.S. content of these products” to boost domestic manufacturing.

Bitar also said the Trump administration’s public discussions have been wide-ranging, addressing non-trade issues such as immigration, crime and other ties, which could make this round of negotiations more difficult than when the USMCA was created.

“Everything is on the table. Not just trade issues,” Bitar said. “The more things are on the table, the longer the negotiations will take and the more uncertainty they will generate.”

The U.S. auto industry has already faced plenty of uncertainty this decade, from pandemic-driven production shutdowns and supply chain shortages to ongoing changes to tariffs and other regulations. It is now preparing for the expected reopening of USMCA negotiations.

It is unclear whether vehicles that meet U.S. compliance measures will continue to face tariffs, which Trump has used aggressively during his presidency as leverage in negotiations and to promote domestic production.

“All the chips are on the table,” Aakash Arora, an automotive expert, partner and managing director at Boston Consulting Group, told CNBC. “But what is clear from all the scenarios discussed is No. 1: higher content from the United States.”

Automakers operating in the United States would like the deal to remain one between the three countries that “strengthens, rather than fragments, this critical economic foundation” for North American trade, according to a letter to Greer from the leaders of the largest auto trade groups in the United States.

“We support bilateral engagement between the United States and Mexico and encourage trilateral discussions to support an effective and efficient review that will ultimately expand the USMCA as a trilateral agreement,” the organizations that represent the vast majority of U.S. automobile manufacturers, suppliers and dealers wrote on May 7.

Trade groups have argued that companies have spent billions of dollars to comply with current USMCA standards and that many automakers are already investing more in the United States.

USMCA generated $182 billion in North American investment, 86% of which was announced for the United States, according to data from the U.S. auto lobbying group.

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 that a deal could be reached by the fall.

“I’m optimistic about the direction we’re going,” he told CNBC in a phone interview Monday, citing increased discussion and public comment. “There are real issues on the table but, in my opinion, none of the [those] are insurmountable. »

A major issue for automakers and others in the industry concerns the deal’s rules of origin, which determine which country a product comes from and which products are eligible for preferential treatment, such as reduced tariffs or duty-free trade.

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

The USMCA currently requires that 75% of “regional value content” for passenger vehicles and light trucks come from North America. The Trump administration would like to increase this level to 82%, with 50% of this value produced in the United States.

There is currently no requirement to separate part contents between what is made in the United States and what is made in Canada. The new rules would require such a distinction, which would involve putting new processes in place.

“Regional content is what people talk about a lot, but it’s really the U.S. content that’s going to matter,” said Mark Wakefield, partner and head of global automotive market at consultancy AlixPartners. “Some of them don’t even really have a plan on how to make them happen, and so it’s going to be a rocky road and a pretty expensive road.”

AlixPartners estimates there is a premium of up to 20% to move a product from Mexico to Canada and up to a 50% increase in costs to move some parts from China to the United States.

BCG also argues that setting standards too high could lead some companies to produce less in the United States. Instead of striving to meet standards, automakers could instead focus on producing vehicles with the cheapest parts outside the United States in order to reduce the declared value of vehicles for import to a level where paying tariffs on a cheaper product would still be financially beneficial.

“In this case, we will not get additional American content,” Arora said. “It’s not a small elevator, and because it’s not a small elevator, there could be unintended consequences.”

A dozen vehicles, including some unique models, reach the current threshold of 75%. None are 80%, with the Volkswagen ID.4 Pro AWD at 76% U.S./Canadian content topping the 2026 model year parts content list released by the National Highway Traffic Safety Administration.

Auto industry executives have said it will take years and billions of dollars of investment in local 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 certain parts and raw materials.

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

BCG’s Arora noted that one way to potentially strengthen U.S. content could be to include original software, which represents a growing share of new vehicles, in the rules of origin. That would help increase the percentage of a vehicle considered U.S. content, he said.

One of the U.S. government’s main goals is to improve production in the states, but it also seeks to shift the U.S. auto supply chain away from China. China has rapidly expanded outside its home base to flood markets with more affordable subsidized vehicles in South America and Europe.

AlixPartners believes that the ideal outcome of 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 business investment, among other things.

“People have been talking about some sort of ‘Fortress America’ and … it really has to be North America,” Wakefield said. “[If] In reality, the goal is to take on China, so it doesn’t really make sense to focus so much on the United States versus Mexico and Canada. »