How might the US-Mexico-Canada trade agreement impact US automotive sales?

Unclear rules about local content could impact sales of some models, but it is unlikely that the total industry will struggle significantly

Augusto Amorim, Senior Manager, Americas Vehicle Sales Forecasts

16 February 2022

While US sales in 2020 were impacted by dealerships and factories being closed to avoid the spread of COVID-19 and in 2021 by the lack of parts that made inventories shrink to dramatically low levels, recent truckers’ protests that blocked a major bridge between Canada and the US remind us of another risk in the short-term: the integration of the US, Canada and Mexico from a trade standpoint.

The new trade agreement between these countries came into force in July 2020, but certain regulations will not come into effect until 2023. However, several behind-the-scenes factors could still impact not only vehicle prices but also which models will be sold in the future. 

In January 2022, Canada joined Mexico in requesting a dispute settlement panel that would address the American interpretation of the automotive rules of origin. While the old NAFTA required vehicles to have 62.5% of content made in the region, the new United States-Mexico-Canada Agreement (USMCA) brought that up to 75%.

Now Mexico and Canada are questioning the US regarding its view on Regional Value Content (RVC) for core parts – namely engines, transmissions and suspensions. The US believes that if an engine is made with 75% of North American parts, it should count for 75% of a vehicle’s overall RVC, but the other two countries believe that it should count for 100%. 

Of course, the sourcing of core parts and other components could change the strategy of any OEM and its suppliers. We estimate that, in 2021, about 62% of vehicles built in North America were equipped with engines built in the US, while Mexico made about 21% of the engines used for local production. Canada had the lowest percentage, at just 5%. 

By way of comparison, US-built vehicles accounted for 54% of sales in the US last year, while those made in Mexico represented 15% of the 14.9 million units sold. Again, Canada had the smallest share, at 7%. In other words, 88% of locally built vehicles were equipped with engines made in North America, but those vehicles accounted for 76% of US sales. While the big picture seems favourable, production of certain models will be localised, but the engines will continue to be imported. 

As well as clarification of the rules from USMCA, the commitment from several OEMs to electrify their portfolios will impact where engines are built. For now, we expect that all companies will adjust to the new rules and market trends, avoiding paying higher taxes and keeping final prices under control. But if the last two years taught us anything, it is that unforeseen events can send sales down very quickly.