Challenges and opportunities for the North American auto industry in the 2026 USMCA renegotiation

Starting in 2017, the Trump administration took several steps that affected auto industry trade. First, his Commerce Department found that auto imports impaired U.S. national and economic security under Section 232 of the Trade Expansion Act of 1962 and recommended tariffs of 25% to 35%, including on North American nations. Yet this report was not published nor acted upon at the time.¹⁵ Second, of relevance to the auto sector as a major input, the administration imposed global 25% tariffs on imported steel and 10% on imported aluminum in July 2018 while negotiating side deals to dampen the impact on North American partners in May 2019.¹⁶ Third, NAFTA was re-negotiated over 2018–2019 to become the USMCA, which tightened ROOs still further—from NAFTA’s 62.5% regional content to a new 75% requirement. It also included requirements that 40% to 45% of a vehicle’s production value must be made by workers earning at least $16 per hour, and 70% of a vehicle manufacturer’s steel and aluminum purchase value must originate in North America.¹⁷

These changes have had mixed results. According to the U.S. International Trade Commission, the new ROOs led firms to make sourcing changes that created a small number of jobs in the auto parts and steel industries, while only modestly increasing consumer prices.¹⁸ However, U.S. firms responded to the higher compliance costs by increasing imports from non-USMCA countries, and by opting to not comply with USMCA duty-free rules and instead pay the U.S.’ 2.5% most-favored nation tariff on passenger vehicles.¹⁹ Rates of non-compliance for autos imported into the U.S. market quintupled (mostly driven by Mexican goods), while non-compliance for auto parts more than doubled for both Canadian and Mexican goods. The labor component of the ROOs did little to raise Mexican wages, as firms opted to meet this requirement through their U.S. and Canadian workers (The average hourly wage of automotive workers in Mexico in 2024 was $5.66, compared to $30.86 in the United States).²⁰ In sum, the USMCA experience made clear that new trade deals alone did not constitute an effective response to U.S. auto sector challenges.

Rival visions: 2021-2025

In 2021, the incoming Biden administration built on the Trump administration’s approach on two fronts, focused on (re)building the social contract between the industry, workers, and the communities they serve. First, they initiated a torrent of labor rights cases under USMCA, using the Rapid Response Labor Mechanism (RRM)—a novel mechanism that Trump had negotiated (under pressure from Democrats in Congress) but never utilized.²¹ Instead of a cumbersome inter-state arbitration process that could take a decade to complete, the RRM allows for relatively rapid expert investigations culminating potentially in the impoundment of goods made at specific facilities until labor abuses are remedied.²² Biden initiated over 50 RRM actions—18 of which were in the automotive industry.²³ These cases led to benefits for about 20,000 workers in Mexico, including reinstatement of workers, payment of backpay, and more democratic union representation.²⁴

Second, Biden attempted to get auto companies to finally take on the challenge of international competition by transitioning to EVs. This was none too soon. While China was a negligible producer of EVs when NAFTA was signed and only a mid-range player when USMCA was negotiated, the country had rapidly expanded its production and exports. By the Biden years, low-cost producers like BYD were capable of supplying far more than Chinese domestic demand and over half of estimated global demand.²⁵ This new challenge compounded the preexisting one that EV production would lead to dislocation of 200,000 workers making gas vehicle propulsion system parts.²⁶ In response, the administration, through the Inflation Reduction Act (IRA) and Bipartisan Infrastructure Law (BIL), offered generous tax credits for EV producers and suppliers, consumer subsidies of up to $7,500 for EV purchases,²⁷ and $39.9 billion in grants and loans for the EV supply chain through the Department of Energy—73 % of which went to firms that had partnerships with labor unions (Canada²⁸ responded by investing $52.5 billion in its EV supply chain and Mexico²⁹ is developing its own policies).³⁰ Finally, in May 2024,³¹ the Biden administration imposed tariffs of 100% on Chinese EVs as a way to safeguard these substantial industrial policy investments (In September 2024, Canada³² matched and Mexico³³ implemented a 50% tariff).³⁴ The combined impact of these policies were impressive. As Figure 2 shows, new investment in electric vehicles and batteries increased more than 500% in North America between the second quarter of 2022 and the end of 2024, while manufacturing factory construction in the U.S. (including these and other sectors supported by Biden’s industrial policies) increased by an unprecedented 130%³⁵ between January 2021 and June 2024 (see Figure 3).³⁶

The second Trump administration has introduced substantial new costs and uncertainty for the industry. First, in February 2025, the second Trump administration reinstated steel and aluminum tariffs that had been paused during the first Trump and Biden administrations, including on Canada and Mexico.³⁷ In March, Canada retaliated by imposing 25% tariffs on U.S. steel and aluminum.³⁸ These were later doubled. Second, in March, the administration picked up the previously-shelved 2019 auto report and imposed 25% tariffs³⁹ on autos and auto parts under Section 232⁴⁰—including those from Canada and Mexico.⁴¹ Canada retaliated in April with a 25% “surtax” on U.S. autos.⁴² Third, in April, on so-called “Liberation Day,” the administration announced across-the-board tariffs of 10% with even higher rates for trade-surplus countries. They then negotiated “Agreements on Reciprocal Trade” (ARTs) with major trading partners like the U.K., EU, Japan, and Korea, which lowered the 25% auto tariff these countries faced to 10% to 15%. As the Big Three American automakers noted,⁴³ this is lower than what North American producers face on their imports from Canada and Mexico. Fourth, on July 4th, the One Big Beautiful Bill Act (OBBBA) repealed the EV consumer tax credit,⁴⁴ leading to a sharp drop⁴⁵ in the sale of EVs and several EV supplier⁴⁶ facilities shuttering.⁴⁷ This latter is especially ironic, given that the consumer subsidies included tough requirements⁴⁸ for local and regional- and ally- sourcing of inputs like critical minerals and batteries—promotion of which is supposedly an Administration priority.⁴⁹ Finally, through the OBBBA and other cuts, the budget for RRM and other USMCA enforcement (which has disproportionately aided autoworkers) was cut dramatically.⁵⁰

Can USMCA 2.0 right the ship?

The USMCA renegotiation offers an opportunity to put the North American auto industry on a firmer footing, especially about addressing challenges from China, the energy transition, and ongoing labor inequities. Here are some changes we would suggest, both incremental and fundamental, all of which have at least some political support. We think it is important to include some more ambitious proposals due to the volatile times we find ourselves in. In such an era, policymakers will be well advised to think less in terms of constitution-style policy lock-in (as in the original expiration-date-less NAFTA), and more in terms of using trade as a tool of industrial policy experimentation and learning over shorter (e.g., years- or decade-long) periods.⁵¹

Coordinate policies to address China competition and promote the energy transition

Given the high degree of integration of the industry, it makes sense to have the countries’ external postures be more consistent. The parties should adopt similar tariffs on EVs, steel, and auto products from outside the bloc, especially China. The U.S. and Canada had been mirroring each other to some extent; Mexico should match these. The U.S. should reinstate its EV subsidies (as recommended in Brookings’s USMCA Forward 2025 edition; Canada and Mexico should proportionately match them.⁵² A joint carbon import fee on goods from outside the bloc, an RRM-like mechanism to sanction polluters within the bloc (as called for by the Sierra Club⁵³ and other environmental groups),⁵⁴ and a joint critical minerals strategy (as called for by the Climate Leadership Council)⁵⁵ are further useful steps. Moreover, recognizing that China’s advantage is in part due to superior technology, it will also be useful to agree on common terms under which Chinese investment in North America is allowed, including provisions for technology transfer and use of Chinese software (to avoid potential surveillance). Although blocked by high tariffs and software bans⁵⁶ in the U.S. and Canada, Chinese automaker BYD is already the fourth largest automaker by sales in Mexico⁵⁷ and is rumored again to be considering building a plant there.⁵⁸ While allowing North Americans to buy $20,000 or $30,000 Chinese EVs would advance climate goals and save consumers money in the short-term, such a policy threatens regional security and high-standard production models, because China’s success is due to high subsidies and low labor and environmental standards⁵⁹ as well as innovation.⁶⁰ Chinese (and ideally other) investment should be allowed only if it includes requirements for neutrality towards union organizing, high environmental standards, and requirements for advanced technology transfer (mimicking Chinese policies toward U.S. multinationals, which traded market access in prior decades for technology transfer that was critical for their current development of superior technology).

Strengthen and modernize Rules of Origin (ROOs)

The ROO changes negotiated in the first Trump administration had less impact than desired, in part because of the low cost of non-compliance through paying the Most Favored Nation (MFN) tariff. Now, higher effective tariffs on imports from outside the bloc in all three countries should make the ROOs more effective. However, new distortions have been introduced by the ARTs, which disincentivize North American production. The ARTs should include similarly stringent local content, labor, and steel ROOs as the USMCA—and the USMCA 2.0 tariff rate should be lower than the ARTs’ rate in recognition of the high degree of regional integration. The American Automotive Policy Council⁶¹ and the United Autoworkers Union⁶² (UAW) have each advanced proposals to change ROO and related calculations to drive more regional procurement and investment.

Strengthen the Rapid Response Mechanism (RRM) and boost labor power

Finally, the renegotiation should acknowledge that much of the discontent with NAFTA and the USMCA is not about the total number of jobs in the industry, but job quality and persistent wage gaps within the bloc. Currently, the RRM applies only to Mexico. The parties should agree to make the mechanism trilateral, have all parties (including the U.S.) ratify all International Labor Organization conventions, and make other reforms recommended by the UAW,⁶³ which has some of the most experience with the mechanism. Given the high degree of integration of the three economies’ auto sectors, the parties should consider experimenting with trinational sectoral labor bargaining. The UAW’s experience putting investment commitments into its collective bargaining agreements shows the value of labor unions as industrial policy partners. Moreover, they would restore foreign aid to fund union-capacity building in Mexico. Many of these calls are echoed by other labor unions, progressive advocacy groups, Mexican labor unions, and manufacturers.⁶⁴

While the Trump administration is unlikely to take up all these reforms of their own initiative, the need for congressional support offers leverage to make the kinds of tough demands that have long characterized North American bargaining in the industry.