The US auto industry faces uncertainty without the USMCA extension

The US auto industry is entering a new phase of uncertainty as the USMCA trade agreement between the United States, Mexico and Canada is not expected to be extended on Wednesday, triggering what could be a year-long review process or the agreement’s expiration if no agreement is reached by 2036.

The United States-Mexico-Canada agreement, which replaced the North American Free Trade Agreement, was established during President Donald Trump’s first term in 2020, but the administration is unhappy with the agreement that controls about two billion dollars annually in goods and services between the three countries.

The auto industry represented about 18% of America’s trade with neighboring countries last year, according to industry data, making it one of the key areas in the negotiations. Automakers and others watching the talks worry that reopening the deal could create more trade uncertainty leading to lower investment and fewer jobs.

“If we let this go on for a long time, it becomes very painful for everyone,” said Diego Marroquín Bitar, a fellow at the Washington, DC-based think tank Center for Strategic and International Studies. “That’s the last thing the county needs.”

There are also concerns that the US may pull out of the deal amid the Trump administration’s aggressive negotiating tactics involving tariffs, trade and other issues.

The United States, Mexico and Canada could have agreed to a 16-year extension on Wednesday, but are not expected to meet that deadline. That opens the annual review process instead.

US officials had previously said they did not plan to extend the agreement, as US representatives sought more domestic investment and benefits under the deal.

US Trade Representative Jamieson Greer said in May that the US wants to strengthen rules of origin in North America “in a way that improves the US content of these goods” to promote domestic production.

Bitar also said that the Trump administration’s public negotiations have been broad, touching on non-trade issues such as immigration, crime and other communications, which could make this round of negotiations more challenging than when the USMCA was established.

“Everything is on the table. Not just trade issues,” said Bitar. “If there are more things on the table, it takes longer to negotiate and it will create more uncertainty.”

The US auto industry has already faced many uncertainties this decade, from pandemic production shutdowns and supply shortages to ongoing changes in taxes and other regulations. It now looks to the expected reopening of USMCA negotiations.

It is unclear whether cars that meet US compliance measures will continue to face tariffs, which Trump has used heavily during his presidency as leverage in negotiations and to promote domestic production.

“All the chips are on the table,” Aakash Arora, an automotive expert, partner and managing director at Boston Consulting Group, told CNBC. “But the obvious one in all the cases discussed is No. 1: top content from the US”

US automakers would like the deal to remain a trilateral agreement that “strengthens, rather than fragments, this critical economic foundation” of North American trade, according to a letter to Gerer from the leaders of major US auto trade groups.

“We support the US-Mexico bilateral negotiations and encourage the trilateral negotiations to support an effective and efficient review that will eventually expand the USMCA as a trilateral agreement,” the associations representing the majority of American car manufacturers, suppliers and dealers wrote on May 7.

Trade groups have argued that companies have spent billions of dollars to address the current USMCA standards and that many auto companies are already investing heavily in the US.

The USMCA drove $182 billion in investment in North America, 86% of which was announced in the US, according to data from the American automotive lobby group.

Across the northern border, Flavio Volpe, president of Canada’s Automotive Parts Manufacturers’ Association and a member of the Canadian prime minister’s council on Canada-US relations, said he hoped a deal could be reached by fall.

“I’m serious about where we’re headed,” he told CNBC in a phone interview Monday, citing the growing number of conversations and public comments. “There are real issues on the table but, in my opinion, there is none [those] they are invincible.”

One major problem for automakers and others in the industry is the treaty’s rules of origin, which determine which country a product comes from and which goods qualify for special treatment, such as reduced tariffs or duty-free trade.

The US auto market has expanded in Canada and expanded its presence significantly in Mexico on the basis of free trade in North America since NAFTA was initiated in 1994. That has led to a large proportion of parts and vehicles crossing borders before being assembled in one of the countries.

The USMCA currently requires 75% “regional value content” for passenger cars and light trucks imported from North America. The Trump administration reportedly wants to increase that rate to 82%, with 50% of that amount produced in the US.

There is currently no need to separate content sections between what is made in the US and what is made in Canada. New rules would require such a distinction, which would mean setting up new procedures.

“Regional value content is what people talk about the most, but it’s actually the US content that will matter,” said Mark Wakefield, partner and global auto market leader at consulting firm AlixPartners. “Some of these don’t even have a plan on how to do it, so it’s going to be a bumpy road, and an expensive road.”

AlixPartners estimates that there is up to a 20% surcharge for moving product from Mexico to Canada and up to a 50% increase in the cost of moving some parts from China to the US.

BCG also says that setting higher standards may cause some companies to produce less in the US Instead of struggling to meet the standards, it said that car manufacturers can focus on producing cars with less expensive parts outside the US to reduce the declared value of cars to be imported to a level where paying the tax on the more expensive product will still be financially beneficial.

“If that’s the case, we don’t get more US content,” Arora said. “It’s not a small lift, and because it’s not a small thing, it can have unintended consequences.”

About a dozen vehicles, including individual models, meet the current 75% limit. None at 80%, with the Volkswagen ID.4 all-wheel-drive Pro at 76% US/Canadian content leading the 2026 model year list of parts content published by the National Highway Traffic Safety Administration.

Auto executives say it will take years and billions of dollars to invest in offshore manufacturing to ensure that cars sold in the US have more American components. They also argued that the US may not be equipped to handle the collection and processing of other parts and materials.

S&P Global Mobility said there are approximately 20,000 car parts when it comes to nuts and bolts. Parts can come from anywhere from 50 to 120 countries.

BCG’s Arora noted another way to improve content in the US would be to include software of origin, which is a growing part of new cars, in the rules of origin. That would help increase the percentage of vehicles that qualify as content in the US, he said.

One of the main goals of the US government is to improve manufacturing in the states, but it is also looking to move the supply chain of American cars away from China. China has been expanding rapidly outside its home base to flood markets with affordable cars, subsidized in South America and Europe.

AlixPartners said it believes that the positive effect of USMCA 2.0 will be to focus on competing with China instead of Mexico or Canada, reducing the costs added to US cars and supporting corporate investment, among other things.

“People have talked about a kind of ‘Fortress America’ and … it really needs North America,” Wakefield said. “[If] actually the goal is to deal with China, so it doesn’t make sense to focus more on the US compared to Mexico and Canada.”