Electric Vehicle Tax Credit, Even Though Stalled, Continues to Raise Hackles in Canada, Mexico

Leading trade officials from Mexico, Canada and the U.S. talked about how to collaborate on more resilient supply chains during a webinar hosted by a prominent Washington think tank, but the conversation could not avoid some of the touchy issues in the trilateral relationship.

The Feb. 28 webinar, hosted by the Brookings Institution as it rolled out a report on how the USMCA can help the countries meet their economic and social goals, ended up touching on several disputes that are the topics for state-to-state panels -- Canadian dairy tariff rate quotas and the U.S. interpretation of auto rules of origin, which are both included in the USMCA tracker, also launched that day. But the proposed electric vehicle purchase tax credit that would ultimately be limited to cars and trucks assembled in the U.S. was perhaps the most prickly topic.

Canada's trade minister, Mary Ng, said that the proposal is not consistent with CUSMA, what Canada calls the new NAFTA, and said that the U.S. should capitalize on the opportunity to work with Canada to create a battery production ecosystem in North America, given that Canada has "a significant portion of the critical minerals" that go into electric vehicle batteries.

Mexico's undersecretary for foreign trade, Luz Maria de la Mora, said the EV tax credit needs to be discussed with the partner countries.

Jayme White, the deputy U.S. trade representative whose portfolio includes the Western Hemisphere, emphasized that Congress came up with the idea, not the administration. "I just want to emphasize the EV proposal is a proposal, it’s not a law. It’s not been passed, it’s not been signed," he said. He also said that while members of Congress like the America-only design, that's "not to say that proposal can't be shaped and reshaped." He also noted that the credit, which was part of the Build Back Better bill advanced in the House, is stalled.

Then he complained that while Mexico is complaining about a law that hasn't passed, its electricity law is causing problems for American firms that want to invest in Mexico. "I really want to keep the focus on where we cooperate in USMCA, not where we have differing views," he added.

Victor Fedeli, Ontario's trade minister, told White, "The problem is the talk about it puts a chill on investment" in Canada's auto sector, even though the bill has not passed.

Fedeli praised the increase in North American content from NAFTA to USMCA, which ultimately will reach 75% to qualify for tariff benefits. He said that will shore up the auto manufacturing sector in the three countries.

But John Murphy, the U.S. Chamber of Commerce's senior vice president for international policy, noted that both Mexico and Canada believe the USTR has an "overly strict interpretation of the rule of origin" for autos, and that a panel will consider their arguments. He said it's good that USMCA has ended the problem of panel blocking that existed under NAFTA, but said that when countries lose a panel decision, now it will be up to countries to comply.

The Brookings report covered five areas where the USMCA can help the region -- improving competitiveness, strengthening supply chains, increasing wages and improving working conditions, supporting the carbon transition and increasing digital trade.