Canada and Mexico have issued warnings that potential tax credits for electric vehicle assembly in the U.S. may run afoul of the U.S.-Mexico-Canada Agreement, according to Inside U.S. Trade. The USMCA sets out rules-of-origin requirements for cars to receive tariff reductions, and Canada and Mexico feel the credits would undermine the commitment to regional content. Mexico's secretary of economy, Tatiana Clouthier, reportedly said in a letter the credits should be changed to "include incentives for all North American content and assembly." The rules for automotive production under the agreement have already been a subject of contention, with Mexico and Canada wanting looser interpretations of the regulations. The continued chip shortage also complicates the negotiations, as vehicle production may not be back to pre-pandemic levels.
Imports of EVs to the U.S. have been surging. Panjiva data shows imports of pure electric cars and buses increased 48.7% year over year in July and August, while imports of hybrids and plug-in hybrids — two other flavors of vehicle electrification — increased 41.8% and 29.8% year over year, respectively, in the same period. These all likely reflect strong consumer demand for automobiles, as noted in Panjiva's research of Oct. 11.
Canada and Mexico may have additional concerns about EVs as it represents a new, fast-growing market that their automotive production bases have an established history with. Defending that production is likely a high priority for the two governments, and the tax credits may represent a long-term threat. Canada and Mexico together represented 36.9% of U.S. pure electric car and bus imports through the first eight months of 2021. Germany was the second-largest importer by value, representing 34.1% of imports, while South Korea and Japan accounted for 9.2% and 3.2% of imports, respectively. Relatively few EVs were imported from China, accounting for only 2.1% of the total.
Among automakers, Panjiva data shows that Ford Motor Co. has the largest share of seaborne EV imports so far in 2021 with 115 shipments, while Volkswagen AG has brought in 30 shipments of EVs. Both companies are likely watching the USMCA rules-of-origin developments closely in order to optimize their supply chains.
Eric Oak is a researcher at Panjiva, a business line of S&P Global Market Intelligence, a division of S&P Global Inc. This content does not constitute investment advice, and the views and opinions expressed in this piece are those of the author and do not necessarily represent the views of S&P Global Market Intelligence. Links are current at the time of publication. S&P Global Market Intelligence is not responsible if those links are unavailable later.