CUSMA Auto Trade Deal: Why the Agreement Is Still Unclear

Talks over the CUSMA auto trade deal continue to create uncertainty for Canada’s automotive industry. While leaders announced progress on reducing tariffs for Canadian-built vehicles heading to the United States, many important details remain unresolved.

What We Know So Far

The nominal tariff rate on Canadian-made cars is expected to settle at 15 percent before any deductions. This figure appears to be the one point of broad agreement. Beyond that number, clarity drops quickly.

The real impact depends on what value automakers can deduct from that 15 percent rate. Canada and Mexico want to use Regional Value Content. This includes parts made across the three CUSMA countries. The United States prefers deductions limited to parts built only in America.

These two approaches produce very different results. Using full regional content could lower the effective tariff to roughly 2.5 to 4 percent. Restricting deductions to U.S.-only content could leave the effective rate between 7.5 and 9 percent. Industry observers say the lower range is manageable for Canadian plants. The higher range is not.

Rules of Origin and Content Requirements

Current CUSMA rules require 75 percent of a vehicle’s parts value to come from the three member countries. American negotiators have pushed for a higher regional threshold of 82 percent. They have also proposed a new U.S.-content minimum, possibly 50 percent.

How that 50 percent would be calculated remains unclear. Applied to the whole vehicle it would be harder to meet. Applied only to the regional content portion it would be easier. Canadian manufacturers favour the more flexible approach.

Additional Complications

Several other technical issues add complexity. One is tariff inversion. Steel and aluminum from Canada still face higher duties than the expected rate on finished vehicles. This creates an odd situation where raw materials cost more to import than the cars made from them.

Another issue involves “rolling up” the value of parts. Under current rules, enough local work on a component can allow its full value to count as regional content. The United States accepts this for smaller parts but resists it for major components such as engines and transmissions.

Why It Matters for Canada

Canadian assembly plants rely heavily on exports to the United States. Clear and workable rules are essential for long-term investment decisions, including those involving electric vehicles and hybrid models. Uncertainty over content requirements and effective tariff rates makes planning difficult for both traditional and electrified vehicle production.

Until negotiators settle the deduction methods, content thresholds, and treatment of major parts, the CUSMA auto trade deal will remain incomplete. The difference between a workable agreement and one that pressures Canadian manufacturing comes down to these technical details.