What Industry Does CUSMA Affect the Most, and Why Is That Important to Know?


In July of 2020, the Canada-United States-Mexico Agreement (CUSMA) entered into force and replaced the North American Free Trade Agreement (NAFTA). The CUSMA trade agreement maintains all of the benefits of NAFTA while refining, modernizing, and adapting aspects of NAFTA that have since been criticized. 

While NAFTA contributed to an explosion of trade and opportunities between the three countries in the region, it was criticized for contributing to job losses and outsourcing that impacted Canada and the U.S., which is why CUSMA was created.

CUSMA seeks to liberalize trade between Canada, the U.S., and Mexico by abolishing tariffs and other trade barriers. On paper, this impacts all industries and businesses from any of these countries that seek to operate or trade with one another. However, CUSMA has been in effect for three years and the industry most impacted has been the automobile industry.

CUSMA and the Automotive Industry

On January 11th, 2023, a report circulated about a dispute resolution panel established under CUSMA that sided with Canada and Mexico against the U.S. regarding automotive rules of origin. This report found that the U.S. was upholding requirements for calculating regional value content (RVC) for passenger vehicles and light trucks that were in violation of CUSMA’s rules of origins.

Now, CUSMA allows vehicle manufacturers to ‘roll-up’ the cost of originating core parts. This will allow for freer trade in the North American automotive market, as Mexico and Canada may now legally retaliate against the U.S. when the U.S. is out of compliance of the agreement by imposing duties or other equal measures.

Understanding Roll-Up

CUSMA’s ‘rules of origin’ regarding vehicle origination is a bit complicated in terms of  preferential tariff treatment. Under these current rules, 72% of the value of finished passenger vehicles and light trucks must originate from CUSMA-member countries (Canada, the U.S., or Mexico). 

Additionally, CUSMA requires 72% of the value of core parts to originate in a CUSMA party, but there are more flexible methods for calculating the RVC of core parts than  for calculating the RVC of a finished vehicle.

On July 1st, 2023, the RVC requirements for both finished vehicles and core parts increased to 75%. Roll-up occurs when a producer considers 100% of the value of an input as originating in a CUSMA party, even if that input includes non-originating material. 

Let’s look at an example:

Your company has a car engine that is made from 85% North American components. Because it extends beyond the 75% threshold, it qualifies as an originating core part under CUSMA. Now, when that engine is incorporated into a finished vehicle, the roll-up method considers 100% of its value to be North American, not just 85%. 

The Dispute With Roll-Up

Previously it was U.S. policy (Alternative Staging Regimes or ASRs) to preclude automotive producers from applying the roll-up technique for core parts, which made it difficult for them to qualify for that preferential tariff treatment. ASRs allowed for producers to import passenger vehicles/light trucks under a different set of requirements than those specified in CUSMA. 

Ultimately, the U.S. was found non-compliant with CUSMA in this regard and the panel fell in favor of Mexico and Canada.

What Does This Mean for Business Owners?

Now, there are two options when accessing the U.S. market for vehicles assembled in Canada and Mexico: one, more vehicles produced in Canada and Mexico will qualify for duty-free access under CUSMA; or two, Canada and Mexico can legally retaliate against the U.S. and target its automotive sector.

The Bottom Line

When importing and exporting automotive parts and finished products between Canada and the U.S. or Mexico and the U.S., business owners must be mindful and aware of their rights within CUSMA. 

If the U.S. remains compliant with the agreed-upon regulations under CUSMA, it means more vehicles produced or assembled in Canada and Mexico will qualify for duty-free access. This means freer trade and greater access to the American market.

For Canada and Mexico, this can breathe new life into their automotive industries, which suffered greatly during the COVID-19 pandemic due to supply chain shortages and factory shutdowns.

About the author

Author: FITT Team

The Forum for International Trade Training (FITT) is the standards, certification and training body dedicated to providing international business training, resources and professional certification to individuals and businesses. Created by business for business, FITT’s international business training solutions are the standard of excellence for global trade professionals around the world.

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