Tariff rates may be the headline issues, but when it comes to CUSMA, like everything Trump touches, it’s complicated

The one number that pretty everyone agrees on is that the nominal tariff rate — that is, before any deductions — on Canadian-built autos will be 15%. That, however, is the total sum of confirmed data. At least, as we went to press.

The big question is what will be allowed to be deducted from that number to reduce our “effective” tariff rate. The choice is fairly binary. The Americans want automakers to only be able to deduct the value of parts built in the U.S., while Mexico and Canada want to be able to deduct what’s called Regional Value Content (RVC, or basically parts built in America and Mexico and Canada).

Here, again, the choices are fairly stark. Using the RVC-deductibility rate for most Canadian-built cars — you can see how the following is calculated here in Monday’s Motor Mouth — the effective tariff on cars shipped south of the border would be somewhere between 2.5% and 4%. If you use the American system — allowing only for content built in the U.S. of A to be deducted — that number would range from 7.5% to 9%. Even if you don’t bother to look up how those numbers were calculated, know this: the former (2.5% to 4%) is probably manageable for Canadian automakers; the latter (7.5% to 9%) is not. It really is a go/no-go situation.

Those raw numbers are also the easiest part of this agreement to understand. More complicated — much more! — is how we define and measure the value of those deductions.

The basics of the rules of origin governing auto parts is fairly simple, with “American content” being fairly self-explanatory and “Regional Value Content” simply the value of the parts made in Mexico, Canada, or the United States used in a locally assembled vehicle.

Exactly what percentage of the total each must represent to be compliant is still a mystery, however. Current rules say 75% of those constituent parts must be built by one of the three signatories. However, the Americans have proposed bumping that RVC requirement up to 82% and adding a new rule, that American content needs to be 50%.

That said, there’s been no specificity as to what that new 50% requirement constitutes. Is it 50% of the total value of the car? Or is it half of the Regional Value Content, which would, if you do the math, make the overall American content required either 37.5% (using current CUSMA rules) or 41% (Trump’s preferred reference number)? It makes a big difference, the former (again, either 37.5% or 41%) a lot easier for Canadian automakers to hit than the latter (50% if it’s applied against the total landed cost of the vehicle).

Like so much of these negotiations, little is known about this aspect of the past two weeks of discussions. We know the American politicians want it. We know Canadian automakers don’t. Other than that, nada.

Now some 18 months into trying to understand how cross-border auto-tariffing works, the most important conclusion I’ve reached is that it’s complicated. As in, I know only one non-OEM analyst — that would be Stephen Beatty, Driving’s former tariff-whisperer — who fully understands all the details. What I can say is that the more I dive into CUSMA’s tariff machinations, the more Byzantine they become.

Here’s one example called “tariff inversion.” As we all know, like Canadian-built cars, steel produced in Canada has been heavily tariffed. As a result of these negotiations, according to the Financial Post, those steel tariffs will now be reduced to 25%. However, that’s still higher — quite a bit higher — than the 2.5% to 4% we’re hoping that Canadian cars heading south will be charged.

In other words — and hence the term “inversion” — the duty on raw materials is higher than it is on the finished product made of that material. That means, all things being equal, an American-built car using imported steel would be more expensive than its Canadian counterpart, the exact opposite effect The Donald was looking for when he started this silliness.

Until now, nothing has been done to counter this anomaly. Have the Americans figured it out yet? Will they do something to right this inversion? Perhaps something as ham-handed as forcing Canadian automakers to buy American steel — and aluminum! — to build our cars when we, of course, have plenty of both here in Canada? Again, how the steel tariffs affect the viability of exporting cars to the United States is not something that’s being discussed in the mainstream media.

Motor Mouth has discussed the “roll-up” of tariffs and the discrepancy between Canadian and American interpretations of how CUSMA says — Article 4.5.4 to be exact, if you wanna look it up yourself — it should be applied. Essentially, rolling up means that, if a country adds enough local value to a part (currently 75%, but that could go to 82% as I mentioned above) they can then value that part as 100% local.

A simple example would be if a piston was forged in Germany or Japan, then sent Canada for finishing. If sufficient work were done — machining valve pockets, ring lands, and, of course, its final circumference — to deem it 75% built here in the Great White North, roll-up rules would then allow us to claim 100% of its worth as Regional Value Content.

America does agree that roll-up is allowable for small bits — again, something like a piston — but inadmissible for what CUSMA calls “super core parts.” These include engines, transmission, suspension sub-assemblies, and the like. Parts, in other words, whose value is large enough that, were roll-up allowed, they would make reaching the Regional Value Content CUSMA demands a lot easier. Little wonder, then, that America doesn’t currently allow Canadian or Mexican automakers to apply roll-up values in their calculation of the RVC they can deduct from their tariff rate.

Some 18 months into trying to understand how cross-border auto-tariffing works, the most important conclusion I’ve reached is that it’s complicated—the more I dive into CUSMA’s tariff machinations, the more Byzantine they become

That would be but a sidenote in all these CUSMA shenanigans were it not for one fact: a trade tribunal already ruled against the American interpretation of the rules more than three years ago, and yet we’ve still adhered to that interpretation of how roll-up can be applied. According to experts — like so many these days, wishing to remain anonymous — that’s because the Canadian government hasn’t been willing to push to have roll-up universally applied.

In other words, Canadian automakers have been operating under rules that have long been judged wrong simply because our politicians didn’t want to poke the bear. Now that said Ursus horribilis has been awoken, could the Canadian government use those long-ignored roll-up rules as a bargaining chip? Would formal recognition of how they are screwing us be worth anything at the negotiation table? Not known. But, if Carney and LeBlanc have been listening to outside experts, it might well be worth throwing into the basket of “concessions” offered on the basis that it won’t hurt us too much. Or at least, not more than we currently being hurt.

Three short months ago, all we could talk about was Chinese EVs. Canadian politicians were promoting the idea we would soon have a larger selection of (barely) more affordable electric vehicles while their American counterparts were threatening us with all manner of malfeasance for daring to deal with BYD and Geely. Forget just tariffing Chinese EVs out of their country, Congress is so incensed that it proposed a law last May — the Protecting America from Chinese Cars Act — that would prevent (Chinese-)EV-loving snowbirds from driving their BYD or Geely across the border on their way to Florida.

Since then, however, not a peep.

That doesn’t mean that some tit-for-tat isn’t being discussed. Almost assuredly, Trump has asked for Carney to cancel the entente he signed with China. The PM, on the other hand, needs to burnish his environmental bona fides, so he’ll be loathe to chase all those Chinese ZEVs from our shores. Could the compromise be that Canada caps the annual tariff rate quota at the 70,000 units that are scheduled in the final year of the deal? I don’t know, but it beggars belief to think that the subject hasn’t been discussed.

Chalk it up as one more thing we don’t know about a “DEAL” supposedly sufficiently finalized that the Prime Minister is already asking that American booze be put back on provincial shelves. The CUSMA, to butcher an otherwise perfectly fine axiom, is in the details, and we still don’t know any of ’em.

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