T-MEC Rules of Origin Drive Up auto Costs, Reshape Trade Flows

New data reveals that the T-MEC’s (USMCA) stringent rules of origin for the automotive sector are significantly impacting the industry, leading to increased production costs and altered trade dynamics between the United States, Mexico, and Canada. A report released July 1st by the United States International Trade Commission (USITC) details these effects, highlighting both the intended benefits and unintended consequences of the trade agreement’s regulations.

USITC Report Highlights Impact of Rules of Origin

The USITC report,titled “Rules of Automotive Origin of the T-MEC: Economic Impact and Operation,” evaluated the effects of the rules of origin from July 2020 to the end of 2024. The core aim of these rules, heavily promoted by the previous governance, was to boost regional content and safeguard manufacturing jobs within North America. While the report acknowledges some successes, it also points to increased costs and trade distortions.

Did You Know? The T-MEC is set for review in September 2025, providing an opportunity to reassess and potentially adjust the rules of origin.

Winners and Losers in the T-MEC Landscape

The USITC report indicates a mixed bag of results. While the rules of origin successfully promoted the production of auto parts and steel within the United States, this came at the expense of reduced intra-regional imports and higher final prices for vehicles. Car manufacturing also experienced a slight slowdown.

Specifically, the US, Mexico, and Canada collectively reduced their imports of engines (436,640 units) and transmissions (607,478 units) from countries outside the T-MEC zone. Steel imports from outside the region also decreased by nearly one million metric tons in 2024.

Though, intraregional trade suffered as well. The United States imported 210,977 fewer engines and 37,591 fewer light vehicles from Canada and mexico due to non-compliance with the T-MEC’s origin requirements.

interestingly, car imports from countries outside the T-MEC actually increased by 14,314 units. These vehicles are not subject to the same regional content conditions, partially negating the intended effect of the trade agreement.

The Rising Cost of Compliance

Complying with the rules of origin has demonstrably increased vehicle production costs. On average, it adds $200 to the variable cost of each vehicle. Changing the origin of transmissions alone raised costs by $212 per unit, while modifications related to steel increased costs by another $166 per car.

These increased costs are ultimately passed on to consumers. The average price of light vehicles in the US rose by $33 per unit (0.1 percent) as a direct result of the T-MEC’s rules of origin.

pro tip: Consumers looking for the best deals on cars should compare prices across diffrent brands and models, considering the potential impact of the T-MEC on specific vehicles.

Impact on Automotive Trade

The USMCA, also known as T-MEC, was designed to modernize and rebalance the North American Free Trade Agreement (NAFTA) [[3]]. the agreement aims to address the challenges of the 21st-century economy. However, the automotive sector has experienced some unintended consequences.

One notable shift is the increasing investment from China in the Mexican automotive industry, notably in the production of electric vehicles [[1]] [[2]]. This investment could further alter the dynamics of automotive trade in the region.

Looking Ahead

as the T-MEC review approaches in September, policymakers will need to carefully consider the trade-offs between promoting regional content and ensuring affordable vehicle prices for consumers. Adjustments to the rules of origin could be necessary to optimize the agreement’s benefits for all stakeholders.

What adjustments to the T-MEC rules of origin would best balance the interests of manufacturers and consumers? How can North America remain competitive in the global automotive market while adhering to regional content requirements?