US auto industry faces uncertainty without USMCA extension

The U.S. auto industry is entering a new phase of uncertainty after the Trump administration said the USMCA trade deal between the United States, Mexico and Canada will not be extended until Wednesday, triggering what could be a year-long review process or the expiration of the pact if a deal is not 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 has soured on the deal that governs roughly $2 trillion annually in goods and services between the three countries.

The auto industry accounted for about 18% of U.S. trade with its neighboring countries last year, according to industry data, making it one of the key sectors in the discussions. Automakers and others watching the talks fear that reopening the deal could create additional trade uncertainty leading to lower investment and fewer jobs.

“If we let this continue for a long time, it will be very painful for everyone,” said Diego Marroquín Bitar, a fellow at the Center for Strategic and International Studies based in Washington, DC. “That's the last thing the region needs.”

There are also concerns that the United States could withdraw from the deal amid aggressive negotiating tactics by the Trump administration involving tariffs, trade and other issues.

The United States, Mexico and Canada could have agreed to a 16-year extension before Wednesday, but will instead go through an annual review process.

U.S. Trade Representative Jamieson Greer said in May that the United States wants to strengthen North American rules of origin “in a way that improves the U.S. content in these products” to boost domestic manufacturing.

Bitar also said the Trump administration's public discussions have been wide-ranging and have touched on non-trade issues such as immigration, crime and other connections, which could make this round of talks more challenging than when the USMCA was established.

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

The U.S. auto industry has already faced a lot of uncertainty this decade, from pandemic production stoppages and supply chain shortages to ongoing changes to tariffs and other regulations. It is now preparing for the reopening of the USMCA talks.

It is unclear whether vehicles that meet U.S. compliance measures would still face tariffs, which Trump has aggressively used during his presidency as leverage in negotiations and to promote domestic production.

“All aspects are on the table,” Aakash Arora, automotive expert, partner and managing director at Boston Consulting Group, told CNBC. “But what is clear in all the scenarios that are being discussed is number 1: greater content from the United States”

Automakers operating in the U.S. would like the deal to remain a three-country agreement that “strengthens, rather than fragments, this critical economic foundation” for North American trade, according to a letter to Greer from the leaders of the largest U.S. auto trade groups.

“We support bilateral engagement between the United States and Mexico and encourage trilateral discussions to support an efficient and effective review that will ultimately extend the USMCA as a trilateral agreement,” the organizations representing the vast majority of American auto manufacturers, suppliers and dealers wrote on May 7.

Trade groups have argued that companies have spent billions of dollars to comply with current USMCA standards and that many auto companies are already investing more in the United States.

The USMCA has generated $182 billion in investments in North America, 86% of which has been announced for the US, according to data from the US automotive lobby group.

Across the northern border, Flavio Volpe, president of the Canadian Automotive Parts Manufacturers Association and a member of the Canadian prime minister's council on Canada-U.S. relations, said he is optimistic a deal can be reached in the fall.

“I'm optimistic about where we're headed,” he told CNBC during a phone interview Monday, citing increased public discussion and comment. “There are real issues on the table but, in my opinion, none of them [those] They are insurmountable.”

An important issue for automakers and others in the industry is the agreement's rules of origin, which determine which country a product comes from and which goods are eligible for preferential treatment, such as reduced tariffs or duty-free trade.

The US automotive market has expanded into Canada and strongly increased its presence in Mexico on the basis of free trade in North America since NAFTA began in 1994. This has led to a large proportion of parts and vehicles crossing borders before being assembled in one of the countries.

Currently, the USMCA requires that 75% of “regional value content” for passenger vehicles and light trucks come from North America. The Trump administration reportedly wants to increase that level to 82%, with 50% of that to be produced in the US.

There is currently no requirement to separate part content between those made in the US and those made in Canada. The new rules would require that distinction, which would mean establishing new processes.

“Regional value content is what people talk a lot about, but really what's going to matter is American content,” said Mark Wakefield, partner and global automotive market leader at consulting firm AlixPartners. “Some of these don't even have a plan on how to do them, so it's going to be a bumpy road and quite expensive.”

AlixPartners estimates there is a premium of up to 20% to move a product from Mexico to Canada and an increase of up to 50% in costs to move some parts from China to the US.

BCG also argues that setting standards too high could cause some companies to produce less in the U.S. Instead of striving to meet standards, it said automakers could focus on producing vehicles with the least expensive parts outside the U.S. to reduce the declared value of vehicles for import to a level where paying tariffs on a less expensive product would still be financially beneficial.

“In that case, we will not get additional American content,” Arora said. “It's not a small increase, and because it's not a small increase, there could be some unintended consequences.”

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

Auto executives have said it would take years and billions of dollars in investments for domestic production to ensure vehicles sold in the United States have more American content. They have also argued that the United States may not be equipped to handle the collection and processing of some parts and raw materials.

S&P Global Mobility has said there are an average of 20,000 parts in a vehicle when stripped down to its nuts and bolts. Parts can originate from between 50 and 120 countries.

BCG's Arora noted that one way to potentially boost U.S. content could be to include origin software, which is a growing part of new vehicles, in the rules of origin. That would help increase the percentage of a vehicle that qualifies as U.S. content, he said.

One of the US government's main goals is to improve production in the United States, but it is also seeking to shift the US auto supply chain away from China. The Asian nation has been rapidly expanding outside its base to flood markets with more affordable subsidized vehicles in South America and Europe.

AlixPartners said it believes the ideal outcome for USMCA 2.0 would be to focus on competitiveness with China rather than Mexico or Canada, minimize added costs to U.S. vehicles and support business investments, among other things.

“People have talked about some kind of 'Fortress America' and… it really needs to be North America,” Wakefield said. “[If] “Really the goal is to confront China, so it doesn't make sense to focus so much on the United States versus Mexico and Canada.”