Canada to join Mexico in filing suit against US rules of origin for cars

Two countries to seek expert tribunal to adjudicate issue under USMCA in early January

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Canada plans to formally join Mexico in seeking an arbitration panel to settle a dispute with the United States over how to interpret rules governing the origin of vehicle parts.

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The two countries plan to request in the early days of January the establishment of an expert tribunal to adjudicate the matter as permitted by the United States-Mexico-Canada agreement, known as the USMCA, according to three people close to the project. The individuals spoke on the condition that they not be identified as they are not authorized to speak publicly on the matter.

The office of Canadian Trade Minister Mary Ng did not immediately respond to requests for comment.

The dispute centers on differences in how to calculate the percentage of a vehicle that collectively comes from the three countries. Mexico and Canada say the trade deal says more parts produced in the region should be considered for duty-free shipping than the United States wants to allow. Motor vehicles are the most traded manufactured product between the three countries.

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The panel – whose findings are binding – will be tasked with deciding whether the US application of content rules, known as rules of origin, is inconsistent with the trade pact.

Canada and Mexico may request the formation of a panel of three or five members selected from a list of pre-agreed legal and business experts under the USMCA. The panel process would be completed no earlier than early July 2022, based on the timelines set out in the trade agreement, according to an August report from White & Case lawyers.

If the court finds the United States is violating the terms of the pact, President Joe Biden’s administration will be forced to seek a negotiated solution. If the talks fail, Canada and Mexico could impose an equivalent “suspension of benefits,” such as higher tariffs.

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The next step

The panel is the next step allowed under the trade deal’s dispute settlement mechanism, after talks between Mexico and the United States failed to resolve the disagreement.

It would also represent an escalation for Canada, which said it only followed the talks between its two trading partners as an interested third party.

But Prime Minister Justin Trudeau, who won re-election with a minority government in September, has come under pressure from business leaders — particularly in the domestic auto industry — to become more aggressive against what Canadians consider as growing US trade protectionism.

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In recent weeks, Canada and the United States have clashed over Biden’s efforts to provide additional tax refunds for electric vehicles built by unionized American workers. The United States, meanwhile, has pushed back on a Canadian proposal for levies on U.S.-based tech giants. Rising US softwood lumber duties and halting Atlantic Canada potato shipments are also causing friction.

The Canadian government announced on Tuesday that it is challenging US duties on Canadian softwood lumber through the USMCA dispute mechanism. Last week, Trudeau asked his top economy ministers to take tougher stances on trade issues amid growing disputes with the United States.

Bloomberg.com

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