The USMCA Crossroads: How a Trade Deal Reopening Could Reshape the North American Auto Industry

The U.S. automotive industry is entering a new phase of uncertainty as the Trump administration confirmed that the USMCA trade agreement between the United States, Mexico, and Canada will not be extended by the Wednesday deadline. This decision triggers what could be a yearslong review process—or potentially an expiration of the pact if no deal is reached by 2036.

The United States-Mexico-Canada Agreement, which replaced NAFTA and was established during President Donald Trump's first term in 2020, governs roughly $2 trillion annually in goods and services between the three countries. The auto industry represented about 18% of America's trading 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 are concerned that reopening the deal could create additional trade uncertainty that leads to lower investments and fewer jobs. "If we let this go on for a very long time, it's very painful for everyone," said Diego Marroquín Bitar, a fellow at the Washington, D.C.-based think tank Center for Strategic and International Studies. "That's the last thing that the region needs."

The Path Forward: Annual Reviews Instead of a 16-Year Extension

The United States, Mexico, and Canada could have agreed to a 16-year extension by Wednesday but will now go to an annual review process instead. U.S. Trade Representative Jamieson Greer in May said the U.S. wants to strengthen North American rules of origin "in a way that enhances U.S. content in these goods" to boost domestic manufacturing.

Bitar also noted that the Trump administration's public discussions have been wide-ranging, touching on nontrade issues such as immigration, crime, and other connections, which could make this round of talks more challenging than when USMCA was established. "Everything is on the table. Not just the trade issues," Bitar said. "The more things on the table, the longer it takes to negotiate and the more uncertainty it will generate."

The broad scope of the negotiations reflects the administration's view that trade policy is intertwined with broader geopolitical and domestic concerns. However, this approach also risks complicating what might otherwise be a straightforward extension of a mutually beneficial agreement.

The Rules of Origin: A Contentious Issue

One major issue for automakers and others in the industry is the deal's rules of origin, which determine what country a product comes from and which goods are eligible for preferential treatment, such as reduced tariffs or duty-free trade. The U.S. automotive market has expanded into Canada and grown its presence strongly in Mexico on the basis of free trade in North America since NAFTA was initiated in 1994. That has led to a large proportion of parts and vehicles traversing borders before being assembled in one of the countries.

USMCA currently requires 75% "regional value content" for passenger vehicles and light trucks to be sourced from North America. The Trump administration reportedly wants to increase that level to 82%, with 50% of that value produced in the U.S. There is currently no requirement to separate the parts content between what's made in the U.S. and what's made in Canada. The new rules would require such a distinction, which would mean setting up new processes, a task that industry experts warn will be both complex and expensive.

"The regional value content is what people are talking about a lot, but really it's the U.S. content that's going to matter," said Mark Wakefield, a partner and global automotive market lead at consulting firm AlixPartners. "Some of these don't even really have a plan as to how to even do them, and so it's going to be a bumpy road, and a fairly expensive road."

The Cost of Compliance

AlixPartners estimates there's an up to 20% premium to move a product from Mexico to Canada and up to a 50% increase in costs for moving some parts from China into the U.S. These additional costs would likely be passed on to consumers, potentially making vehicles less affordable and dampening demand.

BCG also argues that setting the standards too high could cause some companies to actually produce less in the U.S. Instead of striving to meet the standards, it said automakers could instead focus on producing vehicles with the least expensive parts outside of the U.S. to reduce the declared value of the vehicles for import to a level where paying tariffs on a less expensive product would still be financially beneficial. "In that case, we do not get additional U.S. content," said Aakash Arora, an automotive expert, partner and managing director at Boston Consulting Group. "It's not a small lift, and because it's not a small lift, there might be some unintended consequences."

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

Industry Concerns: Investment and Jobs at Stake

Automakers operating in the U.S. would like the deal to remain an agreement between the three countries that "strengthens, rather than fragments, this critical economic foundation" for North American trade, according to a letter to Greer from leaders of the largest automotive trade groups in the U.S. "We support U.S.-Mexico bilateral engagement and encourage trilateral discussions to support an efficient and effective review that will ultimately extend USMCA as a trilateral agreement," the organizations that represent the vast majority of U.S. automakers, suppliers, and dealers wrote May 7.

The trade groups have argued that companies have spent billions of dollars to address current USMCA standards and that many auto companies are already investing more in the U.S. USMCA has driven $182 billion in North American investment, 86% of which has been announced for the U.S., according to U.S. automotive lobbying group data.

Automotive executives have said it would take years and billions of dollars in investments to onshore production to ensure vehicles sold in the U.S. have more American content. They've also argued that the U.S. may not be equipped to handle the collection and processing of some parts and raw materials.

The Canadian Perspective

Across the northern border, Flavio Volpe, president of Canada's 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 could be hammered out by fall. "I'm bullish on where we're headed," he told CNBC, citing increased discussions and public comments. "There are real issues on the table but, in my opinion, none of [those] are insurmountable."

Volpe's optimism reflects the deep integration of the North American auto industry. Supply chains span all three countries, and disruption to one part of the system affects all parts. The Canadian industry, which has strong ties to both the U.S. and Mexican markets, is particularly sensitive to changes in the rules of origin.

A Potential Path Forward: Including Software in Rules of Origin

BCG's Arora noted one way to potentially boost the U.S. content could be to include 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. As vehicles become increasingly software-defined, this approach could provide a pathway to meeting higher local content requirements without requiring massive reshoring of physical manufacturing.

One of the U.S. government's main goals is to improve production in the States, but it's also looking to move the American automobile supply chain away from China. The Asian nation has been rapidly expanding outside of its home base to flood markets with more affordable, subsidized vehicles in South America and Europe.

The Bigger Picture: North America vs. China

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 the costs added to U.S. vehicles, and support company investments, among other things. "People have talked about sort of 'fortress America' and ... it really needs to be North America," Wakefield said. "[If] really the goal is to face off against China, then it doesn't really make sense to be focusing so much on U.S. versus Mexico and Canada."

This perspective underscores the strategic importance of maintaining a unified North American manufacturing base to compete with China's automotive ambitions. The Chinese auto industry has become a global powerhouse, producing more than 30 million vehicles annually and aggressively expanding exports. A fragmented North American market would struggle to compete with China's scale and cost advantages.

The Road Ahead

The U.S. automotive industry has already dealt with a lot of uncertainty this decade, from pandemic production stoppages and supply chain shortages to ongoing changes to tariffs and other regulations. Now it's bracing for the reopening of USMCA talks. It's not clear whether vehicles that meet compliance measures for the U.S. would continue to face tariffs, which Trump has used aggressively during his presidency as leverage in negotiations and to promote domestic production.

"All chips are on the table," BCG's Arora said. "But what is clear across all scenarios being discussed is No. 1: higher content from the U.S."

As the annual review process begins, automakers, suppliers, and dealers will be watching closely for signs of how the negotiations will unfold. The stakes are high: the outcome will shape the competitiveness of the North American auto industry for decades to come. The circus of automotive policy is always evolving, and for the U.S. auto industry, the show is just beginning.