U.S. Manufacturers Say Canadian Factories Have a Tariff Advantage Under CUSMA—and Want Congress to Change the Rules

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An American manufacturer can produce goods for export to Canada and still face U.S. tariffs on the imported components used to make them. Meanwhile, competing factories in Canada and Mexico may qualify for duty relief that eliminates comparable costs. American manufacturers are now pressing Congress to address what they consider an unfair advantage.

The National Association of Foreign-Trade Zones has renewed its push for legislative changes, arguing that existing trade rules can penalize companies for manufacturing in the United States. With the Canada-United States-Mexico Agreement (CUSMA) undergoing a contentious review, the dispute is raising questions about manufacturing investment, cross-border competitiveness, and the future of North American supply chains.

For Canadian businesses, the outcome could influence where companies build factories, source components, and create jobs.

The Warning From U.S. Factory Operators

Jeff Tafel, president of the National Association of Foreign-Trade Zones, described the complaint in a November 8 interview with FreightWaves. His organization represents participants in the American zone system, where companies assemble, manufacture and distribute products under special customs procedures. Tafel argues that some U.S. operators face duties on imported materials when they ship finished goods to Canada or Mexico, while competitors across the borders can obtain comparable duty relief. That is a specific trade-policy complaint, not proof that every Canadian factory enjoys cheaper production.

The concern reaches beyond customs paperwork. A purchasing manager preparing a bid must account for component costs, shipping and any duties that remain payable after export. Even a relatively small difference can matter when an order involves thousands of units. NAFTZ is asking lawmakers to eliminate the disadvantage through U.S. legislation, rather than postpone a decision until the wider CUSMA review is completed.

What Foreign-Trade Zones Actually Do

Foreign-trade zones are designated American facilities overseen by U.S. Customs and Border Protection, not places outside U.S. law. Congress established the system in 1934 to encourage domestic business activity that competes with foreign alternatives. Within an approved zone, companies can store, process or manufacture imported merchandise while generally delaying customs duties until goods enter the domestic market. Merchandise shipped abroad from a zone can often leave without those duties. These arrangements have supported everything from warehouse distribution to complex industrial production.

There is a critical exception. North American trade agreements have limited refunds of duties on certain imported inputs used in goods ultimately shipped between member countries. CUSMA retained this framework from the NAFTA era. A factory therefore cannot assume that producing inside a foreign-trade zone makes every subsequent export duty-free. The distinction turns on what was imported, how it was processed and where the finished item goes.

Why an Export Can Still Carry a U.S. Duty

The disagreement centres on two transactions. A finished product may qualify for preferential customs treatment when it enters Canada under CUSMA, yet the U.S. manufacturer may still owe American duty on foreign components used to make it. Section 81c of U.S. customs law addresses merchandise made or changed within a foreign-trade zone and sent to another CUSMA country. It requires duty assessment for covered merchandise, with limited relief tied to duties paid or owed in the destination country.

Consider a manufacturer assembling industrial equipment for a Canadian customer. Its buyer may receive the completed machine with preferential treatment, while the American producer still has a customs cost attached to imported parts. NAFTZ says Canadian and Mexican competitors can use duty-relief arrangements to avoid comparable costs. The precise difference depends on the product and customs treatment; it should not be mistaken for a universal exemption granted to Canadian-made goods.

The Legislation Already Before Congress

Lawmakers have already received a proposed fix. In December 2025, Texas Republican Lance Gooden introduced the Foreign-Trade Zone Export Enhancement Act, H.R. 6792, with support that included Democratic Representative Vicente Gonzalez. South Carolina Republican Senator Tim Scott introduced a Senate counterpart, S. 4793, in June 2026, initially joined by Alabama Senator Katie Britt. Both measures focus on qualifying goods manufactured or altered in American foreign-trade zones and then directly exported to Canada or Mexico.

The bills would amend U.S. foreign-trade zone law and create a specific duty-free tariff classification, numbered 9801.00.95. The Senate text would also require U.S. Customs and Border Protection to issue implementing regulations within 90 days after enactment. That last phrase matters: neither proposal is currently law. Available congressional records show the House measure referred to Ways and Means and the Senate measure referred to Finance, with neither having passed its chamber.

The Scale of the Trade at Stake

This is not a niche program measured in a handful of warehouses. The U.S. Foreign-Trade Zones Board reported that zone operations received nearly $964 billion in merchandise during 2024 and exported approximately $134 billion. The system employed about 543,000 people across roughly 1,300 active operations, including 381 production operations. Automotive manufacturing, petroleum refining, machinery and pharmaceuticals were among the major industries using the framework. Texas was the largest state for both merchandise received and exports from these zones.

Exports were lower than the roughly $149 billion recorded in 2023, even as the value of merchandise entering zones increased. However, those figures are a snapshot of 2024, before the later rounds of U.S. tariffs that intensified the current debate. They establish the scale of businesses affected by foreign-trade zone rules, not the amount lost because of the disputed provisions. Individual companies’ exposure would require detailed customs records.

The Manufacturers Putting Their Names Behind Reform

Major employers have given the proposed change a recognizable industrial face. BMW Group, whose Spartanburg, South Carolina, plant employs more than 11,000 people, publicly supported Senator Scott’s proposal. The factory exported nearly 200,000 vehicles worth about $9 billion in 2025, according to BMW. Since 2014, it has exported nearly three million vehicles. Those figures show how deeply one American manufacturing site depends on overseas customers, although they do not establish how much BMW itself pays under the disputed duty rules.

AFL, a South Carolina producer of fibre-optic cables and equipment, has also endorsed the legislation. Its president and chief executive, Jaxon Lang, argues that reducing unnecessary export costs would help the company remain competitive while investing in jobs and innovation. For employees on a production line, the debate is less about tariff classifications than whether the next large customer order can be produced locally at an acceptable price.

Why the Next Factory Matters More Than the Last One

The strongest economic argument concerns factories that have not been built yet. Tafel told FreightWaves in November that foreign-trade zone operators are hearing from businesses reassessing sourcing, inventory, shipping routes and warehousing needs. Some are considering whether manufacturing or distribution activity should move across a border. He cautioned, however, that discussing relocation does not mean companies have already carried it out. Investment decisions can involve years of planning and costs that cannot easily be reversed.

The concern has also reached senior U.S. trade policymakers. At a congressional hearing earlier in 2026, House Ways and Means Chairman Jason Smith warned that tariff treatment could make Canada or Mexico more attractive locations for manufacturing plants. U.S. Trade Representative Jamieson Greer responded by discussing changes to rules of origin. The broader dispute is whether policies intended to encourage American production sometimes create incentives to place additional work elsewhere within North America.

Canadian Producers Face Their Own Tariff Risks

A Canadian factory’s position is more complicated than the phrase tariff advantage suggests. Ottawa’s trade guidance explains that CUSMA qualification depends on product-specific origin rules and a valid claim for preferential treatment. It can shield eligible exports from certain U.S. duties, including the broad Section 301 measures introduced in 2026. But it does not automatically cancel other American trade actions. Steel, aluminum, vehicles and certain additional industries face separate sectoral restrictions, depending on the merchandise.

The United States has imposed 50 percent Section 338 tariffs on specified Canadian goods, even on CUSMA-eligible goods. Washington adjusted the covered product lists again in October 2026. That means a Canadian manufacturer can enjoy relief on one transaction while confronting a tariff on another. The export advantage identified by NAFTZ is therefore a targeted comparison of duty-relief programs, not a judgment that operating north of the border has become universally cheaper or safer.

The CUSMA Review and the Road Ahead

The timing makes the legislative argument more consequential. CUSMA entered into force in July 2020, and its first mandatory joint review took place on July 1, 2026. Canada and Mexico supported an extension, but Washington declined to renew the agreement unchanged. That did not terminate it. The agreement remains in force, with annual reviews now required and a 2036 end date if the three governments cannot agree to an extension.

U.S. lawmakers can pursue the foreign-trade zone bills separately while broader negotiations continue. The proposed relief would change American duty treatment for eligible exports; it would not itself rewrite Canadian tariff programs or erase the other U.S. levies affecting Canadian producers. For manufacturers on both sides of the border, the practical test is whether Congress acts and whether the larger review produces stable, workable rules. Until then, factories must price orders against a moving set of customs obligations.

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