The US auto industry faces uncertainty without an extension of the USMCA

The U.S. auto industry is entering a new phase of uncertainty as the Trump administration said the U.S.-Mexico-Canada trade agreement will not be extended by Wednesday, setting off what could be a years-long review process or the expiration of the agreement if an agreement is not reached by 2036.

The United States-Mexico-Canada Agreement, which replaced the North American Free Trade Agreement, was created during President Donald Trump’s first term in 2020, but the administration has soured over the deal that governs nearly $2 trillion annually in goods and services between the three countries.

The auto industry represented about 18% of America’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 monitoring the talks worry that reopening the deal could create more trade uncertainty that leads to lower investment and fewer jobs.

“If we allow this to continue for too long, it will be very painful for everyone,” said Diego Marroquín Bitar, a fellow at the Washington, D.C.-based Center for Strategic and International Studies. “This is the last thing the area needs.”

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

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

US Trade Representative Jamison Greer said in May that the United States wanted to strengthen rules of origin in North America “in a way that enhances US content in these goods” to boost domestic manufacturing.

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

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

The U.S. auto industry has already dealt with a lot of uncertainty this decade, from pandemic production shutdowns and supply chain shortages to ongoing changes in tariffs and other regulations. It is now preparing to reopen USMCA talks.

It is not clear whether vehicles that meet U.S. compliance measures will continue to face tariffs, which Trump has used aggressively during his presidency as leverage in negotiations and to boost domestic production.

“All chips are on the table,” Akash Arora, an auto expert and partner and managing director at Boston Consulting Group, told CNBC. “But what is clear in all the scenarios being discussed is No. 1: higher content than the US.”

Automakers operating in the United States want the deal to remain an agreement between the three countries that “strengthens, rather than fragments, this important economic foundation” for North American trade, according to a letter to Greer from 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 effective and effective review that will ultimately lead to expansion of the USA-Mexico-Canada Agreement as a trilateral agreement,” the organizations representing the vast majority of US automakers, suppliers and traders wrote on May 7.

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

The United States-Mexico-Canada Agreement (USMCA) has attracted $182 billion in investments in North America, 86% of which was declared to the United States, according to data from the US auto lobby group.

Across the northern border, Flavio Volpi, president of the Canadian Auto Parts Manufacturers Association and a member of the Canadian Prime Minister’s Council on Canada-US Relations, said he was optimistic an agreement could be reached by the fall.

“I’m optimistic about the direction we’re headed,” he told CNBC during a phone interview Monday, citing growing discussion and public comment. He added: “There are real issues on the table, but in my opinion, there are none [those] “Can’t be beat.”

One of the key issues facing automakers and others in the industry is the deal’s rules of origin, which determine which country a product comes from and which goods qualify for preferential treatment, such as reduced tariffs or duty-free trade.

The US automobile market has expanded into Canada and has strongly established its presence in Mexico on the basis of free trade in North America since the launch of the North American Free Trade Agreement (NAFTA) in 1994. This has resulted in a large proportion of parts and vehicles crossing borders before being assembled in one country.

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

There is currently no requirement to separate parts content between what is manufactured in the United States and what is manufactured in Canada. New rules require such differentiation, which means creating new processes.

“The regional value content is what people talk about a lot, but it’s actually the US content that’s going to matter,” said Mark Wakefield, partner and global auto market head at consulting firm AlixPartners. “Some of them don’t really have a plan on how to do it, so it’s going to be a bumpy road, a fairly expensive road.”

AlixPartners estimates that there is a premium of up to 20% moving a product from Mexico to Canada and an increase of up to 50% in the costs of transporting some parts from China to the United States

BCG also argues that setting standards that are too high could cause some companies to produce less in the United States. Instead of striving to meet the standards, she said automakers could instead focus on producing vehicles with less expensive parts outside the U.S. to reduce the declared value of imported vehicles to a level where paying tariffs on a less expensive product would still make financial sense.

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

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

Auto executives said it would take years and billions of dollars in investments for onshore production to ensure cars sold in the United States contain more American content. They 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 said there are on average 20,000 parts in a vehicle when it is completely disassembled. Parts can originate in anywhere from 50 to 120 countries.

One way to boost US content is to include original software, an increasing portion of new vehicles, in the rules of origin, Boston Consulting Group’s Arora noted. That would help increase the percentage of vehicles that qualify as U.S. content, he said.

One of the US government’s main goals is to improve production in the US, but it is also looking to move the US auto supply chain away from China. The Asian country is rapidly expanding beyond its home base to flood markets with affordable, subsidized vehicles in South America and Europe.

AlixPartners said it believes the ideal outcome of USMCA 2.0 would be to focus on competitiveness with China rather than Mexico or Canada, reduce costs added to US vehicles, and support company investments, among other things.

“People have talked about a kind of ‘fortress America’ … and it really should be North America,” Wakefield said. “[If] “The goal is really to counter China, so it doesn’t really make sense to focus too much on the U.S. versus Mexico and Canada.”