Price: USMCA review a chance to rebalance trade, fix auto/truck S232 program

This summer, the United States, Mexico, and Canada will begin the first mandatory six-year review of the United States-Mexico-Canada Agreement (USMCA). Required to convene by July 1, 2026, this review will determine whether the agreement is extended another six years, until the next review, or instead enters a period of annual review. Indeed, preparatory bilateral discussions are already underway.

Core to the negotiations will be the need for a fundamental rebalancing of the relationship between the United States, Mexico, and Canada – especially when it comes to the steel and autos supply chain. Over a number of years, a disproportionate amount of US downstream steel-intensive manufacturing (e.g., autos, auto parts, appliances, and many other manufactured goods) has shifted to Mexico and Canada. This has been driven by Mexico and Canada taking advantage of former North American Free Trade Agreement (NAFTA) and current USMCA rules. And it has been exacerbated by loopholes in the Section 232 programs.

The Trump administration has taken steps to address many of these problems, including through the recently issued proclamation on the valuation of Section 232 steel and aluminum derivative products. This major improvement is already resulting in non-auto part producers seeking to shift products, such as aluminum extrusions, back to US producers. However, as we have commented previously, to best support American manufacturing, loopholes in the Section 232 auto/truck parts program need to be closed. Also, the USMCA needs to be further refined.

In particular, the USMCA agreement should be rebalanced to more closely reflect the respective GDPs of USMCA countries. The United States is by far the largest economy in North America. According to the International Monetary Fund, in 2024, US GDP accounted for 88% of the USMCA GDP. Similarly, in 2021, the quantity of vehicles sold by USMCA producers in the United States was 88% of the total quantity of vehicles produced in North America. Yet, over many years of concessional free trade agreements, jobs and production have been siphoned out of the United States to the benefit of Mexico and Canada.

To help address this, USMCA should have a melted-and-poured requirement for steel and steel-intensive products imported into the United States from Mexico or Canada, as US Trade Representative (USTR) Jamieson Greer testified last week on Capitol Hill. Additionally, serious consideration should be given to requiring a proportionate amount of steel content to be melted and poured in the United States. While the labor and regional value content calculations in the USMCA auto rules of origin were intended to be a backdoor means of requiring American steel to be used in key auto parts, a more straightforward solution may now be necessary. This would help rebalance economic incentives and encourage downstream steel production to stay in (or return to) the United States.

A strong and rebalanced USMCA also aligns well with the massive capital outlays being made to build out domestic steel and aluminum production capacity. In recent years, American steel producers have committed more than $20 billion of capital to US production. Billions of dollars have been invested in new furnace capacity, advanced rolling and coating lines, among other projects—creating some of the most efficient, cleanest, and advanced steelmaking assets in the world.

Similarly, in the aluminum sector, the first new US smelter in 50 years is being built in Oklahoma. It will double US capacity. When completed, the Oklahoma investment could be the most expensive single-location US investment in any metals industry. However, even more capacity and investment are needed.  

To help stem the outflow of downstream manufacturing leaving the United States, the Section 232 auto/truck program needs a similar rebalancing. Specifically, while the Section 232 steel and aluminum derivatives programs were rightly reformed to address clear shortfalls (e.g., valuation issues and cheating), enormous loopholes persist in the Section 232 auto/truck program. These loopholes significantly undermine the positive benefits of the entire set of Section 232 programs.

Auto and truck production is complex. Their supply chains are more complicated than most and can take time to move. Initially, the program placed unrealistic timelines on autos and certain auto parts. The net set of changes put into place to address this problem went too far and essentially eliminated coverage of most auto and truck parts from Section 232 duties under all programs and provided no incentive or timeline for transferring production toward the United States. 

Moreover, in the auto and truck parts program, the import offset percentage is too large, which allows US auto and truck part manufacturers to accrue credit amounts that far exceed the Section 232 tariffs owed. In fact, based on our calculations, the offset program essentially zeros out all practical coverage of imported auto parts under the Section 232 program. Further, many USMCA-compliant auto and truck parts are explicitly exempted from Section 232 steel and aluminum tariffs.

Taken together, these loopholes allow auto and truck parts to avoid Section 232 duties. This provides no incentive to reshore auto or truck parts production to the United States. While the Section 232 auto/truck program started with the purpose of supporting part manufacturing in the United States, adjustments to the program resulted in the pendulum swinging too far and has largely nullified those efforts. Unless these concerns are addressed, there will be continued offshoring of auto parts production, primarily to USMCA countries, further displacing domestic production of auto parts as well as steel and aluminum.

Without Section 232 duties in place on auto and truck part imports, the economic relationship between the United States and its USMCA partners continues to be imbalanced. To illustrate, under the current rules, without Section 232, non-USMCA compliant auto or truck parts produced in Mexico or Canada pay a 2.9% tariff when entering the United States. That is far too low of a duty to encourage the reshoring of U.S. manufacturing. In fact, it does the exact opposite, incentivizing auto parts manufacturers to move production to Mexico or Canada. Adjusting the Section 232 program to apply duties on steel and aluminum containing auto parts is necessary to rebalance the incentives toward more US manufacturing. And doing so will work hand-in-hand with USMCA rebalancing.  

Seen in this light, the USMCA joint review is an opportunity for a fundamental rebalancing of the North American steel supply chain and trading relationship in a way that supports domestic manufacturing. It offers policymakers a chance to promote American steel production alongside downstream manufacturing demand, reinforce national security objectives, and ensure that North American integration supports domestic industry rather than hollowing it out.