US-Canada Trade Current Trends

Deeper cooperation between the United States, Canada, and Mexico under the United-States-Mexico-Canada Agreement (USMCA) is required as the U.S. tightens trade and investment restrictions with respect to China and invests in developing critical sectors like semiconductors, electric vehicles (EVs), and clean energy. The truth is that a more concerted North American approach is needed if the United States is to successfully de-risk its economic relationship with China. The United States will probably take a more independent, less successful stance toward China if a unified North American strategy isn't developed. Consequently, North America is a region with intricately linked supply chains, especially in the automotive industry but also encompassing medical devices, IT goods, drugs, chemicals, and other industries.

Reducing the danger in the US-China trade partnership

One major U.S. priority that is expected to only grow is the goal of "de-risking," or decreasing economic interdependence with China. These include more stringent screening procedures for incoming investments, new obligations placed on American investors to inform the Treasury Department of any investments made in China in specific industries, export controls limiting access to American technology utilized in the production of high-end semiconductors, and tariffs. Following the conclusion of the United States Trade Representative's (USTR) Section 301 review of the U.S.-China tariffs, the Biden administration raised tariffs on $18 billion worth of Chinese imports. These tariffs included higher rates on semiconductors, 100% tariffs on electric vehicles (EVs), and higher rates on EV batteries, among other items.

A fresh American strategy toward China?

Canada and Mexico have not imposed such restrictions on trade and investment with China, despite the United States' efforts to do so. For example, Mexico does not have a system in place for vetting incoming investments, and tariffs imposed by Canada and Mexico on Chinese imports are frequently much lower than those imposed by the United States. With the extremely open trade relationship under the USMCA, these contrasts in trade policy toward China are becoming more and more tense politically and economically. The main concern is that if China increases trade and investment with Mexico and Canada to enter the U.S. market while evading U.S. trade and investment restrictions, U.S. action to limit Chinese access to its markets and technologies may be compromised. For instance, EV exports from Mexico that come from BYD's facilities in China may be eligible for the $7500 IRA tax credit for EVs assembled in North America and may enter the United States under the terms of the USMCA with no tariffs if they comply with the agreement's rules of origin, regional steel, and wage rate requirements. Alternatively, rather than paying the 100% tariff rate that the U.S. would impose on EV imports straight from China, BYD may continue to sell EVs from Mexico to the U.S. and pay the WTO MFN rate of 2.5% for automotive imports.

The main concern is that if China increases trade and investment with Mexico and Canada to enter the U.S. market while evading U.S. trade and investment restrictions, U.S. action to limit Chinese access to its markets and technologies may be compromised.

All USMCA parties should aim to develop a North American electric vehicle (EV) industry by utilizing the extensive automotive supply networks that are already in place. For example, in 2022, the United States accounted for more than 50% of Mexico's imports of auto parts and accessories. It will also be necessary to increase capacity for refining, establish battery manufacturing facilities, and speed up the mining of vital minerals in Mexico and Canada.

Yet, there are still gaps in the economic policies of the United States, Canada, and Mexico toward China that need to be resolved if the U.S. is to continue to view EVs (as one example) as an industry that should be developed throughout North America. Regarding EVs, this might entail Mexico enacting a system for screening incoming investments and Mexico and Canada enacting tariffs on Chinese EVs that are comparable to those imposed by the United States.

A little advancement under the USMCA

Thankfully, it seems that the three nations are beginning to focus on working together more closely on China. How North America can work together more effectively to address the China challenge was a recurring theme at the USMCA Free Trade Commission's (FTC) fourth annual meeting on May 22, which was chaired by Mexican Secretary of Economy Raquel Buenrostro, Canadian Trade Minister Mary Ng, and USTR Ambassador Katherine Tai.

In the case of the automotive and other industries, the parties have decided to "jointly expand their collaboration on issues related to non-market policies and practices of other countries, which undermine the Agreement and harm U.S., Canadian, and Mexican workers." China is the nonmarket economy that is of the greatest concern. Addressing China's trade policies and the wider global effects of its economic model will be essential to preventing imports of heavily subsidized EVs and their component parts from China undermining the investment made by the United States, Canada, and Mexico in their EV sectors.